UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35638 | | | | | | | | | | | | | | | | | | | | |
WSFS FINANCIAL CORPORATION |
(Exact name of registrant as specified in its charter) |
| | | | | | |
Delaware | 22-2866913 |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification Number) |
| | | | | | |
| | | | |
| |
| | | | | | |
| | | | | |
| | | |
| | | | | | |
| | | |
| | | |
500 Delaware Ave,
Wilmington, Delaware, 19801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (302) 792-6000
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | WSFS | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | | x | | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | ☐ |
| | | | | |
Emerging growth company | | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Number of shares outstanding of the issuer's common stock, as of the latest practicable date: 63,512,527 shares as of July 31, 2022.
WSFS FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| | | | | | | | |
| PART I. Financial Information | Page |
Item 1. | Financial Statements (Unaudited) | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
PART II. Other Information |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and exhibits hereto, contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:
•difficult market conditions and unfavorable economic trends in the United States generally and in financial markets, particularly in the markets in which the Company operates and in which its loans are concentrated, including difficult and unfavorable conditions and trends related to housing markets, unemployment levels, interest rates, supply chain issues, inflation, economic growth, and the novel coronavirus (COVID-19) pandemic, and related variant developments, vaccination efforts and emergency orders;
•possible additional loan losses and impairment of the collectability of loans;
•the Company’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs and complying with government-imposed foreclosure moratoriums;
•changes in market interest rates, which may increase funding costs and reduce earning asset yields and thus reduce margin;
•the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio;
•the credit risk associated with the substantial amount of commercial real estate, construction and land development and commercial and industrial loans in the Company's loan portfolio;
•the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations and potential expenses associated with complying with such regulations;
•the Company’s ability to comply with applicable capital and liquidity requirements, including its ability to generate liquidity internally or raise capital on favorable terms;
•possible changes in trade, monetary and fiscal policies and stimulus programs, laws and regulations and other activities of governments, agencies, and similar organizations, and the uncertainty of the short- and long-term impacts of such changes;
•any impairments of the Company's goodwill or other intangible assets;
•the discontinued publication of London Inter-Bank Offered Rate (LIBOR) and the transition to an alternative reference interest rate, such as the Secured Overnight Financing Rate (SOFR), including methodologies for calculating the rate that are different from the LIBOR methodology and changed language for existing and new floating or adjustable rate contracts;
•the success of the Company's growth plans, including its plans to grow the commercial small business leasing, residential, small business and Small Business Administration (SBA) portfolios and wealth management business following its recent acquisition of Bryn Mawr Bank Corporation (BMBC or Bryn Mawr Trust);
•the Company’s ability to successfully integrate and fully realize the cost savings and other benefits of its acquisitions, manage risks related to business disruption following those acquisitions, and post-acquisition Customer acceptance of the Company’s products and services and related Customer disintermediation, including its recent acquisition of BMBC (the BMBC Merger);
•negative perceptions or publicity with respect to the Company generally and, in particular, the Company’s trust and wealth management business;
•failure of the financial and operational controls of the Company’s Cash Connect® division;
•adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings;
•the Company's reliance on third parties for certain important functions, including the operation of its core systems, and any failures by such third parties;
•system failures or cybersecurity incidents or other breaches of the Company’s network security, particularly given widespread remote working arrangements;
•the Company’s ability to recruit and retain key Associates;
•the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally;
•the effects of weather, including climate change, and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability, armed conflicts, public health crises and man-made disasters including terrorist attacks;
•the effects of regional or national civil unrest (including any resulting branch or ATM closures or damage);
•additional credit, fraud and litigation risks associated with our PPP lending activities;
•possible changes in the speed of loan prepayments by the Company’s Customers and loan origination or sales volumes;
•possible changes in the speed of prepayments of mortgage-backed securities (MBS) due to changes in the interest rate environment and the related acceleration of premium amortization on prepayments in the event that prepayments accelerate;
•regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its stockholders;
•any reputation, credit, interest rate, market, operational, litigation, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
•other risks and uncertainties, including those discussed herein under the heading “Risk Factors” and in other documents filed by the Company with the Securities and Exchange Commission (SEC) from time to time.
The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. The Company disclaims any duty to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as specifically required by law.
As used in this Quarterly Report on Form 10-Q, the terms “WSFS”, “the Company”, “registrant”, “we”, “us”, and “our” mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.
The following are registered trademarks of the Company: Bryn Mawr Trust®, Cash Connect®, NewLane Finance®, Powdermill® Financial Solutions, West Capital Management®, WSFS Institutional Services®, WSFS Mortgage® and WSFS Wealth® Investments. Any other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands, except per share and share data) | | 2022 | | 2021 | | 2022 | | 2021 |
| | |
Interest income: | | | | | | | | |
Interest and fees on loans and leases | | $ | 129,342 | | | $ | 98,645 | | | $ | 248,223 | | | $ | 207,497 | |
Interest on mortgage-backed securities | | 27,377 | | | 12,506 | | | 50,490 | | | 23,210 | |
Interest and dividends on investment securities: | | | | | | | | |
Taxable | | 702 | | | 702 | | | 1,404 | | | 1,403 | |
Tax-exempt | | 638 | | | 681 | | | 1,257 | | | 1,429 | |
Other interest income | | 1,961 | | | 368 | | | 2,783 | | | 644 | |
| | 160,020 | | | 112,902 | | | 304,157 | | | 234,183 | |
Interest expense: | | | | | | | | |
Interest on deposits | | 3,766 | | | 3,778 | | | 6,894 | | | 8,274 | |
Interest on Federal Home Loan Bank advances | | — | | | — | | | — | | | 5 | |
Interest on senior and subordinated debt | | 1,949 | | | 2,053 | | | 3,878 | | | 4,319 | |
| | | | | | | | |
Interest on trust preferred borrowings | | 682 | | | 317 | | | 1,195 | | | 641 | |
Interest on other borrowings | | 8 | | | 5 | | | 17 | | | 10 | |
| | 6,405 | | | 6,153 | | | 11,984 | | | 13,249 | |
Net interest income | | 153,615 | | | 106,749 | | | 292,173 | | | 220,934 | |
Provision for (recovery of) credit losses | | 8,268 | | | (67,563) | | | 27,239 | | | (87,723) | |
Net interest income after provision for (recovery of) credit losses | | 145,347 | | | 174,312 | | | 264,934 | | | 308,657 | |
Noninterest income: | | | | | | | | |
Credit/debit card and ATM income | | 8,772 | | | 7,567 | | | 16,453 | | | 14,372 | |
Investment management and fiduciary income | | 31,192 | | | 15,360 | | | 61,373 | | | 29,613 | |
Deposit service charges | | 6,071 | | | 5,319 | | | 11,896 | | | 10,779 | |
Mortgage banking activities, net | | 2,211 | | | 4,453 | | | 5,109 | | | 13,053 | |
Loan and lease fee income | | 1,698 | | | 1,730 | | | 3,032 | | | 5,215 | |
Securities gains, net | | — | | | — | | | — | | | 329 | |
Unrealized gain on equity investments, net | | 5,991 | | | 5,261 | | | 5,988 | | | 5,261 | |
| | | | | | | | |
Bank owned life insurance income | | 374 | | | 695 | | | 479 | | | 900 | |
Other income | | 15,720 | | | 8,633 | | | 28,273 | | | 17,318 | |
| | 72,029 | | | 49,018 | | | 132,603 | | | 96,840 | |
Noninterest expense: | | | | | | | | |
Salaries, benefits and other compensation | | 68,189 | | | 52,408 | | | 139,119 | | | 105,546 | |
Occupancy expense | | 9,902 | | | 8,083 | | | 20,694 | | | 16,543 | |
Equipment expense | | 10,388 | | | 7,338 | | | 20,761 | | | 14,729 | |
Data processing and operations expenses | | 5,288 | | | 3,444 | | | 10,647 | | | 6,829 | |
Professional fees | | 5,273 | | | 3,401 | | | 8,724 | | | 7,257 | |
Marketing expense | | 1,637 | | | 1,286 | | | 2,903 | | | 2,278 | |
Loss on debt extinguishment | | — | | | 1,087 | | | — | | | 1,087 | |
FDIC expenses | | 1,468 | | | 1,056 | | | 2,859 | | | 2,125 | |
Loan workout and other credit costs | | (226) | | | (552) | | | 102 | | | 568 | |
Corporate development expense | | 6,393 | | | 2,543 | | | 40,431 | | | 4,638 | |
Restructuring expense | | 3,934 | | | (144) | | | 21,448 | | | (409) | |
| | | | | | | | |
| | | | | | | | |
Other operating expense | | 21,803 | | | 16,082 | | | 40,818 | | | 30,460 | |
| | 134,049 | | | 96,032 | | | 308,506 | | | 191,651 | |
Income before taxes | | 83,327 | | | 127,298 | | | 89,031 | | | 213,846 | |
Income tax provision | | 22,425 | | | 31,687 | | | 24,162 | | | 53,094 | |
Net income | | $ | 60,902 | | | $ | 95,611 | | | $ | 64,869 | | | $ | 160,752 | |
Less: Net income (loss) attributable to noncontrolling interest | | 162 | | | (56) | | | 325 | | | 3 | |
Net income attributable to WSFS | | $ | 60,740 | | | $ | 95,667 | | | $ | 64,544 | | | $ | 160,749 | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.95 | | | $ | 2.01 | | | $ | 1.00 | | | $ | 3.38 | |
Diluted | | $ | 0.94 | | | $ | 2.01 | | | $ | 1.00 | | | $ | 3.37 | |
Weighted average shares of common stock outstanding: | | | | | | | | |
Basic | | 64,224,018 | | | 47,529,143 | | | 64,581,321 | | | 47,519,229 | |
Diluted | | 64,283,288 | | | 47,691,709 | | | 64,696,053 | | | 47,675,223 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | (Unaudited) |
Net income | | $ | 60,902 | | | $ | 95,611 | | | $ | 64,869 | | | $ | 160,752 | |
Less: Net income (loss) attributable to noncontrolling interest | | 162 | | | (56) | | | 325 | | | 3 | |
Net income attributable to WSFS | | 60,740 | | | 95,667 | | | 64,544 | | | 160,749 | |
Other comprehensive (loss) income: | | | | | | | | |
Net change in unrealized (losses) gains on investment securities available-for-sale | | | | | | | | |
Net unrealized (losses) gains arising during the period, net of tax (benefit) of $(26,975), $7,615, $(114,107), and $(14,361), respectively | | (85,422) | | | 24,104 | | | (361,340) | | | (45,485) | |
| | | | | | | | |
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $—, $—, $— and $79, respectively | | — | | | — | | | — | | | (250) | |
| | (85,422) | | | 24,104 | | | (361,340) | | | (45,735) | |
Net change in securities held-to-maturity | | | | | | | | |
Net change in unrealized loss on available-for-sale securities reclassified to held-to-maturity, net of tax benefit of $37,830, $9 , $37,839 and $14, respectively(1) | | (119,796) | | | (28) | | | (119,824) | | | (44) | |
Net change in unfunded pension liability | | | | | | | | |
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax benefit of $(9), (8), $(17) and (13), respectively | | (28) | | | (24) | | | (55) | | | (40) | |
| | | | | | | | |
| | | | | | | | |
Net change in cash flow hedge | | | | | | | | |
Net unrealized gain arising during the period, net of tax expense of $—, $— , $— and $— respectively | | — | | | — | | | 1 | | | — | |
Amortization of unrealized gain on terminated cash flow hedges, net of tax benefit of $(13), $(35) , $(25) and $(70), respectively | | (40) | | | (112) | | | (80) | | | (223) | |
| | (40) | | | (112) | | | (79) | | | (223) | |
Net change in equity method investments | | | | | | | | |
Net change in other comprehensive income of equity method investments, net of tax expense of $59,$— , $59 and $86, respectively | | 188 | | | — | | | 188 | | | 273 | |
Total other comprehensive (loss) income | | (205,098) | | | 23,940 | | | (481,110) | | | (45,769) | |
Total comprehensive (loss) income | | $ | (144,358) | | | $ | 119,607 | | | $ | (416,566) | | | $ | 114,980 | |
(1)Includes $119.8 million, net of tax benefit, of unrealized losses on transferred investment securities with a book value of $1.1 billion from available-for-sale to held-to-maturity.
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| | | | | | | | | | | | | | |
(Dollars in thousands, except per share and share data) | | June 30, 2022 | | December 31, 2021 |
| | | | |
Assets: | | | | |
Cash and due from banks | | $ | 1,036,554 | | | $ | 1,046,992 | |
Cash in non-owned ATMs | | 633,710 | | | 480,527 | |
Interest-bearing deposits in other banks including collateral (restricted cash) of $6,030 at June 30, 2022 and $5,050 at December 31, 2021 | | 6,345 | | | 5,420 | |
Total cash, cash equivalents, and restricted cash | | 1,676,609 | | | 1,532,939 | |
Investment securities, available-for-sale (amortized cost of $5,016,103 at June 30, 2022 and $5,249,882 at December 31, 2021 | | 4,496,087 | | | 5,205,311 | |
Investment securities, held-to-maturity, net of allowance for credit losses of $6 at June 30, 2022 and $4 at December 31, 2021 (fair value $1,063,352 at June 30, 2022 and $94,131 at December 31, 2021) | | 1,064,182 | | | 90,642 | |
Other investments | | 21,064 | | | 10,518 | |
Loans, held for sale at fair value | | 60,775 | | | 113,349 | |
Loans and leases, net of allowance for credit losses of $141,970 at June 30, 2022 and $94,507 at December 31, 2021 | | 11,340,711 | | | 7,791,482 | |
Bank owned life insurance | | 100,515 | | | 33,099 | |
Stock in Federal Home Loan Bank (FHLB) of Pittsburgh at cost | | 10,118 | | | 6,073 | |
Other real estate owned | | 358 | | | 2,320 | |
Accrued interest receivable | | 55,718 | | | 41,596 | |
Premises and equipment | | 120,606 | | | 87,295 | |
Goodwill | | 883,116 | | | 472,828 | |
Intangible assets | | 136,741 | | | 74,403 | |
Other assets | | 583,616 | | | 315,472 | |
Total assets | | $ | 20,550,216 | | | $ | 15,777,327 | |
Liabilities and Stockholders’ Equity | | | | |
Liabilities: | | | | |
Deposits: | | | | |
Noninterest-bearing | | $ | 6,551,542 | | | $ | 4,565,143 | |
Interest-bearing | | 10,718,065 | | | 8,674,919 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total deposits | | 17,269,607 | | | 13,240,062 | |
| | | | |
| | | | |
Trust preferred borrowings | | 90,344 | | | 67,011 | |
Senior and subordinated debt | | 248,372 | | | 147,939 | |
Other borrowed funds | | 31,067 | | | 24,527 | |
Accrued interest payable | | 3,091 | | | 736 | |
Other liabilities | | 594,859 | | | 360,036 | |
Total liabilities | | 18,237,340 | | | 13,840,311 | |
Stockholders’ Equity: | | | | |
Common stock $0.01 par value, 90,000,000 shares authorized; issued 75,870,300 at June 30, 2022 and 57,695,676 at December 31, 2021 | | 759 | | | 577 | |
Capital in excess of par value | | 1,968,175 | | | 1,058,997 | |
Accumulated other comprehensive loss | | (518,878) | | | (37,768) | |
Retained earnings | | 1,272,192 | | | 1,224,614 | |
Treasury stock at cost, 12,283,026 shares at June 30, 2022 and 10,086,936 shares at December 31, 2021 | | (406,888) | | | (307,321) | |
Total stockholders’ equity of WSFS | | 2,315,360 | | | 1,939,099 | |
Noncontrolling interest | | (2,484) | | | (2,083) | |
Total stockholders' equity | | 2,312,876 | | | 1,937,016 | |
Total liabilities and stockholders' equity | | $ | 20,550,216 | | | $ | 15,777,327 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, December 31, 2021 | | 57,695,676 | | | $ | 577 | | | $ | 1,058,997 | | | $ | (37,768) | | | $ | 1,224,614 | | | $ | (307,321) | | | $ | 1,939,099 | | | $ | (2,083) | | | $ | 1,937,016 | |
Net income | | — | | | — | | | — | | | — | | | 64,544 | | | — | | | 64,544 | | | 325 | | | 64,869 | |
Other comprehensive loss | | — | | | — | | | — | | | (481,110) | | | — | | | — | | | (481,110) | | | — | | | (481,110) | |
Cash dividend, $0.26 per share | | — | | | — | | | — | | | — | | | (16,966) | | | — | | | (16,966) | | | — | | | (16,966) | |
Contributions from noncontrolling shareholders | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 187 | | | 187 | |
Issuance of common stock including proceeds from exercise of common stock options | | 57,776 | | | 1 | | | 431 | | | — | | | — | | | — | | | 432 | | | — | | | 432 | |
Issuance of common stock in acquisition of BMT | | 18,116,848 | | | 181 | | | 907,835 | | | — | | | — | | | — | | | 908,016 | | | — | | | 908,016 | |
Noncontrolling interest assumed in acquisition | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (913) | | | (913) | |
Stock-based compensation expense | | — | | | — | | | 3,061 | | | — | | | — | | | — | | | 3,061 | | | — | | | 3,061 | |
Repurchases of common stock (1) | | — | | | — | | | (2,149) | | | — | | | — | | | (99,567) | | | (101,716) | | | — | | | (101,716) | |
Balance, June 30, 2022 | | 75,870,300 | | | $ | 759 | | | $ | 1,968,175 | | | $ | (518,878) | | | $ | 1,272,192 | | | $ | (406,888) | | | $ | 2,315,360 | | | $ | (2,484) | | | $ | 2,312,876 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, March 31, 2022 | | 75,832,292 | | | $ | 758 | | | $ | 1,967,972 | | | $ | (313,780) | | | $ | 1,219,882 | | | $ | (354,369) | | | $ | 2,520,463 | | | $ | (2,646) | | | $ | 2,517,817 | |
Net income | | — | | | — | | | — | | | — | | | 60,740 | | | — | | | 60,740 | | | 162 | | | 60,902 | |
Other comprehensive loss | | — | | | — | | | — | | | (205,098) | | | — | | | — | | | (205,098) | | | — | | | (205,098) | |
Cash dividend, $0.13 per share | | — | | | — | | | — | | | — | | | (8,430) | | | — | | | (8,430) | | | — | | | (8,430) | |
| | | | | | | | | | | | | | | | | | |
Issuance of common stock including proceeds from exercise of common stock options | | 38,008 | | | 1 | | | 2 | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | | — | | | — | | | 1,728 | | | — | | | — | | | — | | | 1,728 | | | — | | | 1,728 | |
Repurchases of common shares (2) | | — | | | — | | | (1,527) | | | — | | | — | | | (52,519) | | | (54,046) | | | — | | | (54,046) | |
Balance, June 30, 2022 | | 75,870,300 | | | $ | 759 | | | $ | 1,968,175 | | | $ | (518,878) | | | $ | 1,272,192 | | | $ | (406,888) | | | $ | 2,315,360 | | | $ | (2,484) | | | $ | 2,312,876 | |
(1)Repurchase of common stock includes 2,124,587 shares repurchased in connection with the Company's share repurchase program approved by the Board of Directors, and 100,093 shares withheld to cover tax liabilities.
(2)Repurchase of common stock includes 1,185,602 shares repurchased in connection with the Company's share repurchase program approved by the Board of Directors, and 96,663 shares withheld to cover tax liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, December 31, 2020 | | 57,575,783 | | | $ | 576 | | | $ | 1,053,022 | | | $ | 56,007 | | | $ | 977,414 | | | $ | (295,293) | | | $ | 1,791,726 | | | $ | (2,246) | | | $ | 1,789,480 | |
Net income | | — | | | — | | | — | | | — | | | 160,749 | | | — | | | 160,749 | | | 3 | | | 160,752 | |
Other comprehensive loss | | — | | | — | | | — | | | (45,769) | | | — | | | — | | | (45,769) | | | — | | | (45,769) | |
Cash dividend, $0.25 per share | | — | | | — | | | — | | | — | | | (11,879) | | | — | | | (11,879) | | | — | | | (11,879) | |
Issuance of common stock including proceeds from exercise of common stock options | | 46,368 | | | 1 | | | 175 | | | — | | | — | | | — | | | 176 | | | — | | | 176 | |
| | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | | — | | | — | | | 2,262 | | | — | | | — | | | — | | | 2,262 | | | — | | | 2,262 | |
Repurchases of common shares (1) | | — | | | — | | | (1,183) | | | — | | | — | | | (12,028) | | | (13,211) | | | — | | | (13,211) | |
Balance, June 30, 2021 | | 57,622,151 | | | $ | 577 | | | $ | 1,054,276 | | | $ | 10,238 | | | $ | 1,126,284 | | | $ | (307,321) | | | $ | 1,884,054 | | | $ | (2,243) | | | $ | 1,881,811 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, March 31, 2021 | | 57,589,330 | | | $ | 576 | | | $ | 1,054,291 | | | $ | (13,702) | | | $ | 1,036,797 | | | $ | (307,321) | | | $ | 1,770,641 | | | $ | (2,187) | | | $ | 1,768,454 | |
Net income (loss) | | — | | | — | | | — | | | — | | | 95,667 | | | — | | | 95,667 | | | (56) | | | 95,611 | |
Other comprehensive income | | — | | | — | | | — | | | 23,940 | | | — | | | — | | | 23,940 | | | — | | | 23,940 | |
Cash dividend, $0.13 per share | | — | | | — | | | — | | | — | | | (6,180) | | | — | | | (6,180) | | | — | | | (6,180) | |
Issuance of common stock including proceeds from exercise of common stock options | | 32,821 | | | 1 | | | 60 | | | — | | | — | | | — | | | 61 | | | — | | | 61 | |
| | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | | — | | | — | | | 1,107 | | | — | | | — | | | — | | | 1,107 | | | — | | | 1,107 | |
Repurchases of common shares (1) | | — | | | — | | | (1,182) | | | — | | | — | | | — | | | (1,182) | | | — | | | (1,182) | |
Balance, June 30, 2021 | | 57,622,151 | | | $ | 577 | | | $ | 1,054,276 | | | $ | 10,238 | | | $ | 1,126,284 | | | $ | (307,321) | | | $ | 1,884,054 | | | $ | (2,243) | | | $ | 1,881,811 | |
(1)Repurchase of common stock includes 267,309 shares repurchased in connection with the Company's share repurchase program approved by the Board of Directors and 17,732 shares withheld to cover tax liabilities.
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
(Dollars in thousands) | | 2022 | | 2021 |
| | |
Operating activities: | | | | |
Net income | | $ | 64,869 | | | $ | 160,752 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Provision for (recovery of) credit losses | | 27,239 | | | (87,723) | |
Depreciation of premises and equipment, net | | 15,076 | | | 6,575 | |
Accretion of fees and discounts, net | | (5,537) | | | (26,820) | |
Amortization of intangible assets | | 10,605 | | | 5,302 | |
Amortization of right-of-use lease assets | | 11,599 | | | 5,988 | |
Decrease in operating lease liability | | (9,254) | | | (6,688) | |
Income from mortgage banking activities, net | | (5,109) | | | (13,053) | |
Gain on sale of securities, net | | — | | | (329) | |
Loss on sale of other real estate owned and valuation adjustments, net | | (255) | | | (45) | |
Stock-based compensation expense | | 3,061 | | | 2,262 | |
Unrealized gain on equity investments, net | | (5,988) | | | (5,261) | |
| | | | |
| | | | |
Deferred income tax (benefit) expense | | (3,448) | | | 30,162 | |
(Increase) decrease in accrued interest receivable | | (3,421) | | | 4,060 | |
Decrease (increase) in other assets | | 17,909 | | | (8,046) | |
Origination of loans held for sale | | (324,227) | | | (510,421) | |
Proceeds from sales of loans held for sale | | 321,515 | | | 569,341 | |
Decrease (increase) in value of bank owned life insurance | | 109 | | | (708) | |
Increase in capitalized interest, net | | (1,202) | | | (1,551) | |
(Decrease) increase in accrued interest payable | | (887) | | | 527 | |
Increase (decrease) in other liabilities | | 126,515 | | | (35,248) | |
| | | | |
Net cash provided by operating activities | | $ | 239,169 | | | $ | 89,076 | |
Investing activities: | | | | |
Purchases of investment securities held to maturity | | $ | (49,088) | | | $ | — | |
Repayments, maturities and calls of investment securities held-to-maturity | | 28,487 | | | 16,240 | |
Sale of investment securities available-for-sale | | — | | | 9,332 | |
Purchases of investment securities available-for-sale | | (1,166,663) | | | (1,267,988) | |
Repayments, maturities and calls of investment securities available-for-sale | | 784,871 | | | 354,265 | |
| | | | |
Proceeds from bank-owned life insurance death benefit | | 1,437 | | | — | |
| | | | |
Net decrease in loans | | 86,523 | | | 914,464 | |
Net cash from business combinations | | 573,745 | | | — | |
Purchase of loans held-for-investment | | (137,008) | | | (88,405) | |
Purchases of stock of Federal Home Loan Bank of Pittsburgh | | (1,314) | | | (585) | |
Redemptions of stock of Federal Home Loan Bank of Pittsburgh | | 1 | | | 266 | |
Sales of other real estate owned | | 1,844 | | | 2,402 | |
Investment in premises and equipment | | (4,436) | | | (3,005) | |
Sales of premises and equipment | | 891 | | | 427 | |
Net cash provided by (used in) investing activities | | $ | 119,290 | | | $ | (62,587) | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
(Dollars in thousands) | | 2022 | | 2021 |
| | |
Financing activities: | | | | |
Net increase in demand and saving deposits | | $ | 32,850 | | | $ | 1,133,691 | |
Decrease in time deposits | | (91,628) | | | (106,803) | |
Decrease in brokered deposits | | (37,948) | | | (155,462) | |
| | | | |
| | | | |
Repayments of FHLB advances | | — | | | (6,623) | |
| | | | |
| | | | |
Contribution from noncontrolling shareholders | | 187 | | | — | |
Cash dividend | | (16,966) | | | (11,879) | |
Issuance of common stock including proceeds from exercise of common stock options | | 432 | | | 176 | |
Redemption of senior debt | | — | | | (100,000) | |
| | | | |
| | | | |
Repurchases of common shares | | (101,716) | | | (13,211) | |
Net cash (used in) provided by financing activities | | $ | (214,789) | | | $ | 739,889 | |
Increase in cash, cash equivalents, and restricted cash | | 143,670 | | | 766,378 | |
Cash, cash equivalents, and restricted cash at beginning of period | | 1,532,939 | | | 1,654,735 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 1,676,609 | | | $ | 2,421,113 | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 9,630 | | | $ | 12,722 | |
Income taxes | | 15,796 | | | 21,999 | |
Non-cash information: | | | | |
Loans transferred to other real estate owned | | — | | | 606 | |
Loans transferred to portfolio from held-for-sale at fair value | | 54,684 | | | 24,782 | |
| | | | |
Securities transferred to held-to-maturity from available-for-sale at fair value | | 931,421 | | | — | |
Held-to-maturity securities purchased, not settled | | 8,355 | | | — | |
Fair value of assets acquired, net of cash received | | 4,712,782 | | | — | |
Fair value of liabilities assumed | | 4,378,511 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
(UNAUDITED)
1. BASIS OF PRESENTATION
General
These unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (WSFS, and together with its subsidiaries, the Company), and its consolidated subsidiaries. WSFS’ primary subsidiary is Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank). As of June 30, 2022, the other subsidiaries of WSFS include WSFS Wealth Management, LLC (Powdermill®), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress), WSFS SPE Services, LLC, The Bryn Mawr Trust Company of Delaware (BMT-DE), and 601 Perkasie, LLC. The Company also has 3 unconsolidated subsidiaries: WSFS Capital Trust III, Royal Bancshares Capital Trust I, and Royal Bancshares Capital Trust II. WSFS Bank has 2 wholly owned subsidiaries: Beneficial Equipment Finance Corporation (BEFC) and 1832 Holdings, Inc., and 1 majority-owned subsidiary, NewLane Finance Company (NewLane Finance®).
Additionally, WSFS and the Bank acquired certain subsidiaries in the merger of Bryn Mawr Bank Corporation (BMBC) with and into WSFS on January 1, 2022, and the merger of The Bryn Mawr Trust Company with and into the Bank (collectively, the BMBC Merger), pursuant to the agreement and plan of merger, by and between WSFS and BMBC, dated as of March 9, 2021 (the BMBC Merger Agreement) that are not named herein as they are not integral or significant to our business.
On April 1, 2022, WSFS completed the merger of Christiana Trust Company of Delaware® and BMT-DE. The combined organization will retain and operate under The Bryn Mawr Trust Company of Delaware name. Additionally on April 1, 2022, Bryn Mawr Equipment Finance, Inc. merged with and into BEFC. On April 29, 2022, KCMI Capital, Inc. (KCMI), a specialized commercial lending unit acquired in the BMBC merger and not core to our overall lending strategy, was sold at par value for $55.5 million. Finally, on June 30, 2022, the business of BMT Insurance Advisors (BMTIA), was sold to Patriot Growth Services, LLC.
Overview
Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). The Company provides residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. The banking business is commercial lending funded primarily by customer-generated deposits. In addition, the Company offers a variety of wealth management and trust services to individuals, institutions and corporations. The Federal Deposit Insurance Corporation (FDIC) insures the customers’ deposits to their legal maximums. The Company serves its customers primarily from 121 offices located in Pennsylvania (62), Delaware (39), New Jersey (18), Virginia (1) and Nevada (1), its ATM network, website at www.wsfsbank.com and mobile app. Information on the website is not incorporated by reference into this Quarterly Report on Form 10-Q.
Basis of Presentation
In preparing the unaudited Consolidated Financial Statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Amounts subject to significant estimates include the allowance for credit losses (including loans and leases held for investment, investment securities available-for-sale and held-to-maturity), fair values of assets acquired and liabilities assumed in acquisitions accounted for as business combinations using the acquisition method of accounting, lending-related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, and income taxes. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets, the establishment of additional allowance and lending-related commitment reserves, changes in the fair value of financial instruments, as well as increased post-retirement benefits and income tax expense.
The Company's accounting and reporting policies conform to Generally Accepted Accounting Principles in the U.S. (GAAP), prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2022. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2021 (the 2021 Annual Report on Form 10-K) that was filed with the SEC on March 1, 2022 and is available at www.sec.gov or on the website at www.wsfsbank.com. All significant intercompany accounts and transactions were eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the Company's 2021 Annual Report on Form 10-K. Those significant accounting policies remain unchanged at June 30, 2022.
RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncement was adopted by the Company during the six months ended June 30, 2022, but does not have a material impact on the unaudited Consolidated Financial Statements:
•ASU No. 2021-05, Leases (Topic 842), Lessors – Certain Leases with Variable Lease Payments
There were no other applicable material accounting pronouncements adopted by the Company since December 31, 2021.
Accounting guidance pending adoption at June 30, 2022
ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures: In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors (ASC 310-40) while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The guidance also requires that an entity disclose current-period write-offs by year of origination for financing receivables and net investments in leases within the scope of Topic 326. The guidance is effective for annual periods beginning after December 15, 2022. Early adoption is permitted. Adoption is required on a prospective basis, except for the transition method related to the recognition and measurement of TDRs where the entity as to apply on a modified-retrospective basis. The Company is currently evaluating the impact upon adoption and will apply the guidance after completion of its assessment.
3. BUSINESS COMBINATIONS
Bryn Mawr Bank Corporation.
On January 1, 2022, WSFS closed its acquisition of BMBC and acquired 100% of the outstanding common stock of BMBC. In accordance with the terms of the merger agreement, dated March 9, 2021, by and between WSFS and BMBC, each share of BMBC common stock was exchanged for 0.90 shares of WSFS common stock (with cash paid in lieu of fractional shares). The total value of consideration paid was $908.0 million based on 19,903,230 shares of BMBC common stock outstanding as of December 31, 2021, the vesting of 226,643 BMBC restricted stock awards, and the closing price per share of WSFS common stock of $50.12 on December 31, 2021. Results of the combined Company’s operations are included in the unaudited Consolidated Financial Statements since the date of the acquisition.
BMBC was the holding company for The Bryn Mawr Trust Company (Bryn Mawr Bank), a Pennsylvania chartered bank and wholly-owned subsidiary. BMBC and Bryn Mawr Bank were headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia, and served primarily the Greater Philadelphia region. BMBC and its direct and indirect subsidiaries was a locally managed, premier financial services company providing retail and commercial banking; trust administration and wealth management; and insurance and risk management solutions. Following the BMBC Merger, WSFS Bank is the oldest and largest, locally headquartered bank and trust company in the Greater Philadelphia and Delaware region with a full-service product suite and a balance sheet to compete with larger regional and national banks. The BMBC Merger also allows WSFS to accelerate our long-term strategic objectives, including scale to continue to invest in our delivery and talent transformations.
The acquisition of BMBC was accounted for as a business combination using the acquisition method of accounting and, accordingly, the assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The excess of consideration transferred over the fair value of net assets acquired was recorded as goodwill, which is not amortizable nor deductible for tax purposes. The Company allocated goodwill to its WSFS Bank segment and Wealth Management segment.
The following table summarizes the consideration transferred and the fair values of identifiable assets acquired and liabilities assumed:
| | | | | |
(Dollars in thousands) | |
Consideration Transferred: | Fair Value |
Common shares issued (18,116,848) | $ | 908,016 | |
Cash paid to BMBC stock and option holders | 16 | |
Value of consideration | 908,032 | |
Assets acquired: | |
Cash and due from banks | 573,761 | |
Investment securities | 500,400 | |
Loans and leases | 3,456,748 | |
Premises and equipment | 44,842 | |
Deferred income taxes | 6,322 | |
Bank owned life insurance | 67,525 | |
Intangible assets | 73,065 | |
| |
Other assets | 153,593 | |
Total assets | 4,876,256 | |
Liabilities assumed: | |
Deposits | 4,110,271 | |
Other borrowings | 145,512 | |
Other liabilities | 123,642 | |
Noncontrolling interest | (913) | |
Total liabilities and noncontrolling interest | 4,378,512 | |
Net assets acquired: | 497,744 | |
Goodwill resulting from acquisition of BMBC | $ | 410,288 | |
The following table details the changes to goodwill recorded subsequent to acquisition:
| | | | | | | | |
(Dollars in thousands) | | Fair Value |
Goodwill resulting from the acquisition of BMBC reported as of March 31, 2022 | | $ | 414,337 | |
Effects of adjustments to: | | |
| | |
| | |
| | |
| | |
Deferred income taxes | | 2,111 | |
Intangibles | | 1,500 | |
| | |
| | |
Other liabilities | | 441 | |
Effect of sale of BMTIA business | | (8,101) | |
Goodwill resulting from the acquisition of BMBC as of June 30, 2022 | | $ | 410,288 | |
Adjustments to Goodwill were primarily related to the fair value of Wealth Management intangible assets, the subsequent sale of the BMTIA business, and the related deferred tax impacts.
While the valuation of acquired assets and liabilities is substantially completed, fair value estimates related to the assets and liabilities from BMBC are subject to adjustment for up to one year after the closing date of the acquisition as additional information becomes available. Valuations subject to adjustment include, but are not limited to, Wealth Management intangibles, loans, and deferred income taxes as management continues to review the estimated fair values and evaluate the assumed tax position. When the valuation is final, any changes to the preliminary valuation of acquired assets and liabilities could result in adjustments to identified intangibles and goodwill. The fair values of assets acquired and liabilities assumed is expected to be finalized during the remeasurement period, which ends one year from the closing date, or January 1, 2023.
The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition, and represents the excess purchase price over the estimated fair value of the net assets acquired from BMBC.
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. In many cases, the fair values of the assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and applying the appropriate market discount rates.
Cash and due from banks: The estimated fair values of cash and due from banks approximate their stated value.
Investment Securities: The acquired investment portfolio had a fair value of $500.4 million, primarily consisting of short-term U.S. Treasury bills that matured subsequent to closing on January 6, 2022. The estimated fair value approximated the stated value at maturity.
Loans and Leases: The Company recorded $3.5 billion of acquired loans, which were initially recorded at their fair values as of the acquisition date. Fair value for loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The PD, LGD, exposure at default and prepayment assumptions are the key factors driving credit losses which are embedded into the estimated cash flows.
The table below presents information with respect to the fair value and unpaid principal balance of acquired loans and leases at the acquisition date.
| | | | | | | | | | | | | | |
| | January 1, 2022 |
(Dollars in thousands) | | Book Balance | | Fair Value |
Commercial and industrial | | $ | 613,197 | | | $ | 586,643 | |
Owner-occupied commercial | | 513,267 | | | 503,182 | |
Commercial mortgages | | 1,564,234 | | | 1,549,515 | |
Construction | | 209,928 | | | 208,288 | |
Commercial small business leases | | 125,770 | | | 119,119 | |
Residential | | 310,092 | | | 315,454 | |
Consumer | | 178,247 | | | 174,547 | |
Total acquired loans and leases | | $ | 3,514,735 | | | $ | 3,456,748 | |
The table below presents the carrying amount of loans for which, at the date of acquisition, there was evidence of more than insignificant deterioration of credit quality since origination:
| | | | | | | | |
(Dollars in thousands) | | January 1, 2022 |
Book balance of loans at acquisition | | $ | 235,791 | |
Allowance for credit losses at acquisition | | (26,103) | |
Non-credit related discount | | (1,421) | |
Total purchase credit deteriorated (PCD) loans acquired | | $ | 208,267 | |
The BMBC Merger resulted in the addition of $49.6 million in allowance for credit losses, including the $26.1 million identified in the table above for PCD loans, and $23.5 million for non-PCD loans recorded through the provision for credit losses at the date of acquisition.
Deferred Income Taxes: The Company recorded a deferred income tax asset (DTA) of $6.3 million related to tax attributes of BMBC along with the effects of fair value adjustments resulting from acquisition accounting for the combination. The DTA’s recorded were based on the expected federal and state tax benefits of when the acquired tax attributes and purchase accounting adjustments will reverse. In recording the DTA, consideration was given to potential limitations on the realizability of such acquired tax attributes. There was no material change to the valuation allowance as a result of the BMBC Merger.
Trust preferred borrowings and subordinated debt: The fair value of trust preferred borrowings and subordinated debt were determined by present valuing the expected cash flows using current market rates for similar instruments. A fair value discount of $2.5 million was recognized for the trust preferred borrowings and will be recognized as an increase to interest expense over the remaining life of the borrowings. A fair value premium of $0.7 million was recognized for the subordinated debt and will be recognized as a decrease to interest expense over the remaining life of the debt.
Intangible Assets: The Company recorded $10.9 million of core deposit intangible (CDI) which is being amortized over ten years using a straight-line amortization methodology. The fair value of the core deposit intangible was determined using the cost savings approach. The cost savings approach is defined as the difference between cost of funds on deposits and the cost of an equal amount of funds from an alternative source. The CDI fair value was determined by projecting net cash flow benefits, including assumptions related to customer attrition, discount rates, deposit interest rates, and alternative costs of funds.
Certificates of deposit accounts were valued by segregating the portfolio into pools based on remaining maturity and comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The valuation adjustment will be accreted or amortized to interest expense over the remaining maturities of the respective pools.
WSFS recorded $56.1 million of Wealth Management intangible assets that consisted of $53.0 million for customer relationships in our wealth management, trust and insurances lines of business, $2.9 million for the Bryn Mawr Trust tradename, and $0.2 million in non-compete agreements. Fair value for these Wealth Management intangible assets was based on a discounted cash flow methodology projecting net cash flow benefits, including assumptions related to customer attrition, discount rates, income projections and applicable growth rate assumptions.
Corporate development expenses and Restructuring expenses
For acquisitions, the Company develops comprehensive integration plans under which it has incurred direct costs, which are expensed as incurred. These direct costs include costs are primarily related to: (i) terminated contracts, (ii) consolidated facilities (including lease termination expenses), (iii) severance, (iv) marketing, and (v) professional and legal fees. Costs related to the acquisition and restructuring are included in the Corporate development expense and Restructuring expense line items, respectively, on the unaudited Consolidated Statements of Income.
The following table details the costs identified and classified as corporate development and restructuring expenses, which are primarily related to the BMBC Merger:
| | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(dollars in thousands) | | 2022 | | 2022 |
Salaries, benefits and other compensation | | $ | 2,215 | | | $ | 12,258 | |
Occupancy expense | | 1,121 | | | 11,360 | |
Equipment expense | | 3,104 | | | 19,690 | |
Professional fees | | 3,106 | | | 11,883 | |
Data processing and operations expenses | | 71 | | | 99 | |
Marketing expense | | 1,931 | | | 2,973 | |
| | | | |
Other operating expense, net | | (1,221) | | | 3,616 | |
Total corporate development and restructuring expenses | | $ | 10,327 | | | $ | 61,879 | |
During the second quarter of 2021, WSFS announced a retail banking office optimization plan that included the planned consolidation of Bryn Mawr Trust and WSFS Bank banking offices. Most of the consolidations and rebranding of the banking offices were completed during the first quarter of 2022, which included the consolidation of 22 Bryn Mawr Trust and 12 WSFS Bank banking offices. Costs related to this plan are included in the Corporate development expense line item on the unaudited Consolidated Statements of Income. In addition, the Company had $13.1 million of premises and equipment as held-for-sale as of June 30, 2022, which is included in the Other assets line item on the unaudited Consolidated Statement of Financial Condition.
Pro Forma Income Statement (unaudited)
The following pro forma income statement for the three and six months ended June 30, 2021 presents the pro forma results of operations of the combined institution (BMBC and the Corporation) as if the BMBC Merger occurred on January 1, 2021. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger expenses have been included in the pro forma results of operations.
| | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(dollars in thousands, except share and per share data) | | 2021 | | 2021 |
Net interest income | | $ | 139,810 | | | $ | 288,779 | |
Provision for credit losses | | (51,202) | | | (97,954) | |
Net interest income after provision for credit losses | | 191,012 | | | 386,733 | |
Total noninterest income | | 69,984 | | | 137,647 | |
Total noninterest expenses | | 132,713 | | | 264,821 | |
Income before income taxes | | 128,283 | | | 259,559 | |
Income tax provision | | 32,391 | | | 64,164 | |
Net income | | $ | 95,892 | | | $ | 195,395 | |
Per share data: | | | | |
Weighted-average basic shares outstanding | | 65,420,226 | | | 65,423,241 | |
Dilutive shares | | 317,220 | | | 294,422 | |
Adjusted weighted-average diluted shares | | 65,737,446 | | | 65,717,663 | |
Basic earnings per common share | | $ | 1.47 | | | $ | 2.99 | |
Diluted earnings per common share | | $ | 1.46 | | | $ | 2.97 | |
Due to the various conversions of BMBC systems since the date of acquisition, as well as other streamlining and continuing integration of BMBC's operating activities into those of the Company, reporting for revenue and net income of the former BMBC operations for the period subsequent to the acquisition is impracticable.
4. NONINTEREST INCOME
Credit/debit card and ATM income
The following table presents the components of credit/debit card and ATM income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Bailment fees | $ | 4,014 | | | $ | 3,320 | | | $ | 6,799 | | | $ | 6,379 | |
Interchange fees | 3,890 | | | 3,485 | | | 7,989 | | | 6,540 | |
Other card and ATM fees | 868 | | | 762 | | | 1,665 | | | 1,453 | |
Total credit/debit card and ATM income | $ | 8,772 | | | $ | 7,567 | | | $ | 16,453 | | | $ | 14,372 | |
Credit/debit card and ATM income is composed of bailment fees, interchange fees, and other card and ATM fees. Bailment fees are earned from bailment arrangements with customers. Bailment arrangements are legal relationships in which property is delivered to another party without a transfer of ownership. The party who transferred the property (the bailor) retains ownership interest of the property. In the event that the bailee files for bankruptcy protection, the property is not included in the bailee's assets. The bailee pays an agreed-upon fee for the use of the bailor's property in exchange for the bailor allowing use of the assets at the bailee's site. Bailment fees are earned from cash that is made available for customers' use at an offsite location, such as cash located in an ATM at a customer's place of business. These fees are typically indexed to a market interest rate. This revenue stream generates fee income through monthly billing for bailment services.
Credit/debit card and ATM income also includes interchange fees. Interchange fees are paid by a merchant's bank to a bank that issued a debit or credit card used in a transaction to compensate the issuing bank for the value and benefit the merchant receives from accepting electronic payments. These revenue streams generate fee income at the time a transaction occurs and are recorded as revenue at the time of the transaction.
Investment management and fiduciary income
The following table presents the components of investment management and fiduciary income: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Trust fees | $ | 20,398 | | | $ | 10,808 | | | $ | 39,488 | | | $ | 20,572 | |
Wealth management and advisory fees | 10,794 | | | 4,552 | | | 21,885 | | | 9,041 | |
Total investment management and fiduciary income | $ | 31,192 | | | $ | 15,360 | | | $ | 61,373 | | | $ | 29,613 | |
Investment management and fiduciary income is composed of trust fees and wealth management and advisory fees. Trust fees are based on revenue earned from custody, escrow, trustee and trustee related services on structured finance transactions; indenture trustee, administrative agent and collateral agent services to individuals, institutions and corporations; commercial domicile and independent director services; and investment and trustee services to families and individuals. Most fees are flat fees, except for a portion of personal and corporate trustee fees where the Company earns a percentage on the assets under management or assets held within a trust. This revenue stream primarily generates fee income through monthly, quarterly and annual billings for services provided.
Wealth management and advisory fees consists of fees from legacy Bryn Mawr Trust Wealth Management (excluding The Bryn Mawr Trust Company of Delaware), Cypress, West Capital, Powdermill®, and WSFS Wealth® Investments. Wealth management and advisory fees are based on revenue earned from services including asset management, financial planning, family office, and brokerage. The fees are based on the market value of assets, are assessed as a flat fee, or are brokerage commissions. This revenue stream primarily generates fee income through monthly, quarterly and annual billings for the services.
Deposit service charges
The following table presents the components of deposit service charges:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Service fees | $ | 3,972 | | | $ | 3,553 | | | $ | 7,856 | | | $ | 6,975 | |
Return and overdraft fees | 1,896 | | | 1,504 | | | 3,671 | | | 3,082 | |
Other deposit service fees | 203 | | | 262 | | | 369 | | | 722 | |
Total deposit service charges | $ | 6,071 | | | $ | 5,319 | | | $ | 11,896 | | | $ | 10,779 | |
Deposit service charges includes revenue earned from core deposit products, certificates of deposit, and brokered deposits. The Company generates fee revenues from deposit service charges primarily through service charges and overdraft fees. Service charges consist primarily of monthly account maintenance fees, cash management fees, foreign ATM fees and other maintenance fees. All of these revenue streams generate fee income through service charges for monthly account maintenance and similar items, transfer fees, late fees, overlimit fees, and stop payment fees. Revenue is recorded at the time of the transaction.
Other income
The following table presents the components of other income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Managed service fees | $ | 4,387 | | | $ | 4,504 | | | $ | 8,225 | | | $ | 8,113 | |
Currency preparation | 929 | | | 1,160 | | | 1,800 | | | 2,108 | |
ATM loss protection | 674 | | | 628 | | | 1,282 | | | 1,250 | |
Capital market revenue | 3,437 | | | — | | | 4,945 | | | — | |
Miscellaneous products and services(1) | 6,293 | | | 2,341 | | | 12,021 | | | 5,847 | |
Total other income | $ | 15,720 | | | $ | 8,633 | | | $ | 28,273 | | | $ | 17,318 | |
(1)Includes commissions income from BMTIA. The BMTIA business was sold during the second quarter.
Other income consists of managed service fees, which are primarily courier fees related to cash management, currency preparation, ATM loss protection, capital markets revenue, and other miscellaneous products and services offered by the Bank. These fees are primarily generated through monthly billings or at the time of the transaction. Through its subsidiary BMTIA, the Bank earned commissions from the sale of insurance policies, which are generally calculated as a percentage of the policy premium, and contingent income, which is calculated based on the volume and performance of the policies held by each carrier. Obligations for the sale of insurance policies are generally satisfied at the point in time which the policy is executed and are recognized at the point in time in which the amounts are known and collection is reasonably assured. Performance metrics for contingent income are generally satisfied over time, not exceeding one year, and are recognized at the point in time in which the amounts are known and collection is reasonably assured.
Arrangements with multiple performance obligations
The Company's contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers.
Practical expedients and exemptions
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
See Note 16 for further information about the disaggregation of noninterest income by segment.
5. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars and shares in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income attributable to WSFS | $ | 60,740 | | | $ | 95,667 | | | $ | 64,544 | | | $ | 160,749 | |
Denominator: | | | | | | | |
Weighted average basic shares | 64,224 | | | 47,529 | | | 64,581 | | | 47,519 | |
Dilutive potential common shares | 59 | | | 163 | | | 115 | | | 156 | |
Weighted average fully diluted shares | 64,283 | | | 47,692 | | | $ | 64,696 | | | $ | 47,675 | |
Earnings per share: | | | | | | | |
Basic | $ | 0.95 | | | $ | 2.01 | | | $ | 1.00 | | | $ | 3.38 | |
Diluted | $ | 0.94 | | | $ | 2.01 | | | $ | 1.00 | | | $ | 3.37 | |
Outstanding common stock equivalents having no dilutive effect | 51 | | | — | | | 7 | | | 1 | |
Basic earnings per share is calculated by dividing Net income attributable to WSFS by the weighted-average basic shares outstanding. Diluted earnings per share is calculated by dividing Net income attributable to WSFS by the weighted-average fully diluted shares outstanding, using the treasury stock method. Fully diluted shares include the adjustment for the dilutive effect of common stock awards, which include outstanding stock options and unvested restricted stock units under the 2013 Incentive Plan and the 2018 Incentive Plan.
6. INVESTMENTS
Debt Securities
The following tables detail the amortized cost, allowance for credit losses and the estimated fair value of the Company's investments in available-for-sale and held-to-maturity debt securities. None of the Company's investments in debt securities are classified as trading.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Allowance for Credit Losses | | Fair Value |
Available-for-Sale Debt Securities | | | | | | | | | | |
Collateralized mortgage obligation (CMO) | | $ | 624,579 | | | $ | 64 | | | $ | 66,988 | | | $ | — | | | $ | 557,655 | |
Fannie Mae (FNMA) mortgage-backed securities (MBS) | | 3,997,394 | | | 1,473 | | | 406,409 | | | — | | | 3,592,458 | |
Freddie Mac (FHLMC) MBS | | 123,756 | | | 25 | | | 7,385 | | | — | | | 116,396 | |
Ginnie Mae (GNMA) MBS | | 41,078 | | | 21 | | | 1,938 | | | — | | | 39,161 | |
Government-sponsored enterprises (GSE) agency notes | | 229,296 | | | — | | | 38,879 | | | — | | | 190,417 | |
| | $ | 5,016,103 | | | $ | 1,583 | | | $ | 521,599 | | | $ | — | | | $ | 4,496,087 | |
Held-to-Maturity Debt Securities(1) | | | | | | | | | | |
FNMA MBS | | $ | 931,421 | | | $ | — | | | $ | — | | | $ | — | | | $ | 931,421 | |
State and political subdivisions | | 132,267 | | | 322 | | | 1,151 | | | 6 | | | 131,432 | |
Foreign bonds | | 500 | | | — | | | 1 | | | — | | | 499 | |
| | $ | 1,064,188 | | | $ | 322 | | | $ | 1,152 | | | $ | 6 | | | $ | 1,063,352 | |
(1)Held-to-maturity securities transferred from available-for-sale are included in held-to-maturity at fair value basis at the time of transfer. The amortized cost of transferred held-to-maturity securities included net unrealized losses of $157.4 million at June 30, 2022, which are offset in Accumulated other comprehensive (loss) income. At the time of transfer, there was no allowance for credit loss on the available-for-sale securities. Subsequent to transfer, the securities were evaluated for credit loss.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Allowance for Credit Losses | | Fair Value |
Available-for-Sale Debt Securities | | | | | | | | | | |
CMO | | $ | 586,830 | | | $ | 3,569 | | | $ | 14,633 | | | $ | — | | | $ | 575,766 | |
FNMA MBS | | 4,275,307 | | | 24,170 | | | 53,793 | | | — | | | 4,245,684 | |
FHLMC MBS | | 139,708 | | | 6,336 | | | 516 | | | — | | | 145,528 | |
GNMA MBS | | 17,456 | | | 551 | | | 71 | | | — | | | 17,936 | |
GSE agency notes | | 230,581 | | | — | | | 10,184 | | | — | | | 220,397 | |
| | $ | 5,249,882 | | | $ | 34,626 | | | $ | 79,197 | | | $ | — | | | $ | 5,205,311 | |
Held-to-Maturity Debt Securities(1) | | | | | | | | | | |
State and political subdivisions | | $ | 90,146 | | | $ | 3,489 | | | $ | — | | | $ | 4 | | | $ | 93,631 | |
Foreign bonds | | 500 | | | — | | | — | | | — | | | 500 | |
| | $ | 90,646 | | | $ | 3,489 | | | $ | — | | | $ | 4 | | | $ | 94,131 | |
| | | | | | | | | | |
(1)Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of transferred held-to-maturity securities included net unrealized gains of $0.2 million at December 31, 2021, which are offset in Accumulated other comprehensive income. At the time of transfer, there was no allowance for credit loss on the available-for-sale securities. Subsequent to transfer, the securities were evaluated for credit loss.
The scheduled maturities of available-for-sale debt securities at June 30, 2022 and December 31, 2021 are presented in the table below: | | | | | | | | | | | | | | |
| | Available-for-Sale |
| | Amortized | | Fair |
(Dollars in thousands) | | Cost | | Value |
June 30, 2022 (1) | | | | |
Within one year | | $ | 1,890 | | | $ | 1,888 | |
After one year but within five years | | 98,602 | | | 95,371 | |
After five years but within ten years | | 361,217 | | | 329,345 | |
After ten years | | 4,554,394 | | | 4,069,483 | |
| | $ | 5,016,103 | | | $ | 4,496,087 | |
December 31, 2021 (1) | | | | |
Within one year | | $ | — | | | $ | — | |
After one year but within five years | | 103,960 | | | 107,009 | |
After five years but within ten years | | 204,186 | | | 204,289 | |
After ten years | | 4,941,736 | | | 4,894,013 | |
| | $ | 5,249,882 | | | $ | 5,205,311 | |
(1)Actual maturities could differ from contractual maturities.
As of June 30, 2022, the Company’s available-for-sale investment securities consisted of 960 securities, 936 of which were in an unrealized loss position.
As of June 30, 2022, substantially all of the Corporation’s available-for-sale investment securities were mortgage-backed securities or collateral mortgage obligations which were issued or guaranteed by U.S. government-sponsored entities and agencies.
As of June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.
The scheduled maturities of held-to-maturity debt securities at June 30, 2022 and December 31, 2021 are presented in the table below: | | | | | | | | | | | | | | |
| | Held-to-Maturity |
| | Amortized | | Fair |
(Dollars in thousands) | | Cost | | Value |
June 30, 2022 (1) | | | | |
Within one year | | $ | 731 | | | $ | 730 | |
After one year but within five years | | 5,567 | | | 5,580 | |
After five years but within ten years | | 40,830 | | | 40,830 | |
After ten years | | 1,017,060 | | | 1,016,212 | |
| | $ | 1,064,188 | | | $ | 1,063,352 | |
December 31, 2021 (1) | | | | |
Within one year | | $ | 232 | | | $ | 234 | |
After one year but within five years | | 2,675 | | | 2,736 | |
After five years but within ten years | | 44,137 | | | 45,404 | |
After ten years | | 43,602 | | | 45,757 | |
| | $ | 90,646 | | | $ | 94,131 | |
(1)Actual maturities could differ from contractual maturities.
MBS may have expected maturities that differ from their contractual maturities. These differences arise because issuers may have the right to call securities and borrowers may have the right to prepay obligations with or without prepayment penalty. The estimated weighted average duration of MBS was 6.0 years at June 30, 2022.
The held-to-maturity debt securities are not collateral-dependent securities as these are general obligation bonds issued by cities, states, counties, or other local and foreign governments.
During the second quarter of 2022, the Company transferred investment securities with a book value of $1.1 billion from available-for-sale to held-to-maturity to mitigate the impact of the rising interest rate environment to Accumulated other comprehensive (loss) income in the Company's Consolidated Statement of Changes in Stockholders' Equity. The transfer occurred at a fair value totaling $931.4 million. The amortized cost of transferred held-to-maturity securities included net unrealized losses of $157.6 million at June 30, 2022, which are offset in Accumulated other comprehensive (loss) income. No gains or losses on these securities were recognized at the time of transfer.
Investment securities with fair market values aggregating $2.5 billion and $2.2 billion were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of June 30, 2022 and December 31, 2021, respectively.
During the six months ended June 30, 2022, the Company had no sales of debt securities categorized as available-for-sale, resulting in no realized gains and no realized losses. During the six months ended June 30, 2021, the Company sold $9.3 million of debt securities categorized as available-for-sale resulting in $0.3 million of realized gains and no realized losses.
As of June 30, 2022 and December 31, 2021, the Company's debt securities portfolio had remaining unamortized premiums of $66.7 million and $69.4 million, respectively, and unaccreted discounts of $26.6 million and $12.7 million, respectively.
For debt securities in an unrealized loss position and an allowance has not been recorded, the table below shows the gross unrealized losses and fair value by investment category and length of time that individual debt securities were in a continuous unrealized loss position at June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Duration of Unrealized Loss Position | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss |
Available-for-sale debt securities: | | | | | | | | | | | | |
CMO | | $ | 375,687 | | | $ | 32,423 | | | $ | 167,328 | | | $ | 34,565 | | | $ | 543,015 | | | $ | 66,988 | |
FNMA MBS | | 3,083,263 | | | 334,083 | | | 421,083 | | | 72,326 | | | 3,504,346 | | | 406,409 | |
FHLMC MBS | | 104,590 | | | 5,638 | | | 8,718 | | | 1,747 | | | 113,308 | | | 7,385 | |
GNMA MBS | | 36,513 | | | 1,626 | | | 1,880 | | | 312 | | | 38,393 | | | 1,938 | |
GSE agency notes | | 36,484 | | | 6,455 | | | 153,933 | | | 32,424 | | | 190,417 | | | 38,879 | |
| | $ | 3,636,537 | | | $ | 380,225 | | | $ | 752,942 | | | $ | 141,374 | | | $ | 4,389,479 | | | $ | 521,599 | |
| | | | | | | | | | | | |
Held-to-maturity debt securities: | | | | | | | | | | | | |
FNMA MBS | | $ | 751,546 | | | $ | 122,546 | | | $ | 179,874 | | | $ | 35,044 | | | $ | 931,420 | | | $ | 157,590 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
For debt securities in an unrealized loss position, the table below shows the gross unrealized losses and fair value by investment category and length of time that individual debt securities were in a continuous unrealized loss position at December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Duration of Unrealized Loss Position | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss |
Available-for-sale debt securities: | | | | | | | | | | | | |
CMO | | $ | 411,347 | | | $ | 12,730 | | | $ | 35,638 | | | $ | 1,903 | | | $ | 446,985 | | | $ | 14,633 | |
FNMA MBS | | 3,018,606 | | | 41,021 | | | 356,665 | | | 12,772 | | | 3,375,271 | | | 53,793 | |
FHLMC MBS | | 11,227 | | | 348 | | | 1,917 | | | 168 | | | 13,144 | | | 516 | |
GNMA MBS | | 4,847 | | | 71 | | | — | | | — | | | 4,847 | | | 71 | |
GSE agency notes | | 64,509 | | | 1,918 | | | 155,888 | | | 8,266 | | | 220,397 | | | 10,184 | |
| | $ | 3,510,536 | | | $ | 56,088 | | | $ | 550,108 | | | $ | 23,109 | | | $ | 4,060,644 | | | $ | 79,197 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
At June 30, 2022, available-for-sale debt securities for which the amortized cost basis exceeded fair value totaled $4.4 billion. Total unrealized losses on these securities were $521.6 million at June 30, 2022. The Company does not have the intent to sell, nor is it more likely than not it will be required to sell these securities before it is able to recover the amortized cost basis. The unrealized losses are the result of changes in market interest rates subsequent to purchase, not credit loss, as these are highly rated agency securities with no expected credit loss, in the event of a default. As a result, there is no allowance for credit losses recorded for available-for-sale debt securities as of June 30, 2022.
At June 30, 2022 and December 31, 2021, held-to-maturity debt securities had an amortized cost basis of $1.1 billion and $90.6 million, respectively. The held-to-maturity debt security portfolio primarily consists of mortgage-backed securities which were issued or guaranteed by U.S. government-sponsored entities and agencies and highly rated municipal bonds. The Company monitors credit quality of its debt securities through credit ratings. The following table summarizes the amortized cost of debt securities held-to-maturity as of June 30, 2022, aggregated by credit quality indicator:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | FNMA MBS | | State and political subdivisions | | Foreign bonds |
A+ rated or higher | | $ | — | | | $ | 132,267 | | | $ | 500 | |
Not rated | | 931,421 | | | — | | | — | |
Ending balance | | $ | 931,421 | | | $ | 132,267 | | | $ | 500 | |
The following table summarizes the amortized cost of debt securities held-to-maturity as of December 31, 2021, aggregated by credit quality indicator:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | State and political subdivisions | | Foreign bonds |
A+ rated or higher | | $ | 90,146 | | | $ | 500 | |
Not rated | | — | | | — | |
Ending balance | | $ | 90,146 | | | $ | 500 | |
The Company reviewed its held-to-maturity debt securities by major security type for potential credit losses. There was no activity in the allowance for credit losses for FNMA MBS and foreign bond debt securities for the six months ended June 30, 2022 and 2021. The following table presents the activity in the allowance for credit losses for state and political subdivisions debt securities for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(Dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Allowance for credit losses: | | | | | | | | |
Beginning balance | | $ | 4 | | | $ | 5 | | | $ | 4 | | | $ | 6 | |
| | | | | | | | |
Provision for credit losses | | 2 | | | — | | | 2 | | | (1) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Ending balance | | $ | 6 | | | $ | 5 | | | $ | 6 | | | $ | 5 | |
Accrued interest receivable of $1.0 million and $0.9 million as of June 30, 2022 and December 31, 2021, respectively, for held-to-maturity debt securities were excluded from the evaluation of allowance for credit losses. There were no nonaccrual or past due held-to-maturity debt securities as of June 30, 2022 and December 31, 2021.
Equity Investments
The Company had equity investments with a fair value of $21.1 million and $10.5 million as of June 30, 2022 and December 31, 2021, respectively.
During the three and six months ended June 30, 2022, total net gains on equity investments of $6.0 million were recorded, driven by an unrealized gain on the Company's investment in CRED.ai presented within Unrealized gain on equity investment, net in the Consolidated Statements of Income.
During the three and six months ended June 30, 2021, the Company recorded an unrealized gain on its remaining investment in Visa Class B shares of $0.2 million and an unrealized gain of $5.1 million on its investment in Social Finance, Inc. (SoFi).
7. LOANS AND LEASES
The following table shows the Company's loan and lease portfolio by category: | | | | | | | | | | | | | | |
| | | | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Commercial and industrial(1) | | $ | 2,594,937 | | | $ | 1,918,043 | |
Owner-occupied commercial | | 1,823,229 | | | 1,341,707 | |
Commercial mortgages | | 3,321,654 | | | 1,881,510 | |
Construction | | 934,324 | | | 687,213 | |
Commercial small business leases | | 512,803 | | | 352,276 | |
Residential(2) | | 773,138 | | | 546,667 | |
Consumer(3) | | 1,522,596 | | | 1,158,573 | |
| | 11,482,681 | | | 7,885,989 | |
Less: | | | | |
| | | | |
Allowance for credit losses | | 141,970 | | | 94,507 | |
Net loans and leases | | $ | 11,340,711 | | | $ | 7,791,482 | |
(1) Includes Paycheck Protection Program (PPP) loans of $5.2 million at June 30, 2022 and $31.5 million at December 31, 2021.
(2) Includes reverse mortgages at fair value of $2.6 million at June 30, 2022 and $3.9 million at December 31, 2021.
(3) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
Accrued interest receivable on loans and leases was $42.9 million and $31.6 million at June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on loans and leases was excluded from the evaluation of allowance for credit losses.
8. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY INFORMATION
The following tables provide the activity of allowance for credit losses and loan balances for the three and six months ended June 30, 2022 and 2021. The increase was primarily due to an initial ACL of $49.6 million recorded in connection with the BMBC Merger and loan growth during the quarter. The initial $49.6 million ACL recorded includes $23.5 million related to non-PCD loans, or the initial provision for credit loss recorded, and $26.1 million related to PCD loans, which does not have an initial income statement impact, but adjusts the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial(1) | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer(3) | | Total |
Three months ended June 30, 2022 | | | | | | | | | | | | |
Allowance for credit losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 65,716 | | | $ | 6,125 | | | $ | 23,105 | | | $ | 3,145 | | | $ | 4,956 | | | $ | 33,283 | | | $ | 136,330 | |
| | | | | | | | | | | | | | |
Charge-offs | | (2,549) | | | — | | | — | | | — | | | — | | | (1,418) | | | (3,967) | |
Recoveries | | 870 | | | 141 | | | 1 | | | — | | | 144 | | | 183 | | | 1,339 | |
(Credit) provision | | (3,116) | | | (756) | | | 557 | | | 1,913 | | | (112) | | | 9,782 | | | 8,268 | |
Ending balance | | $ | 60,921 | | | $ | 5,510 | | | $ | 23,663 | | | $ | 5,058 | | | $ | 4,988 | | | $ | 41,830 | | | $ | 141,970 | |
Six months ended June 30, 2022 | | | | | | | | | | | | |
Allowance for credit losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 49,967 | | | $ | 4,574 | | | $ | 11,623 | | | $ | 1,903 | | | $ | 3,352 | | | $ | 23,088 | | | $ | 94,507 | |
Initial allowance on acquired PCD loans | | 22,614 | | | 595 | | | 2,684 | | | 71 | | | 61 | | | 78 | | | 26,103 | |
Charge-offs | | (6,188) | | | (179) | | | (37) | | | — | | | (186) | | | (2,228) | | | (8,818) | |
Recoveries | | 1,471 | | | 267 | | | 122 | | | — | | | 530 | | | 549 | | | 2,939 | |
(Credit) provision(4) | | (6,943) | | | 253 | | | 9,271 | | | 3,084 | | | 1,231 | | | 20,343 | | | 27,239 | |
Ending balance | | $ | 60,921 | | | $ | 5,510 | | | $ | 23,663 | | | $ | 5,058 | | | $ | 4,988 | | | $ | 41,830 | | | $ | 141,970 | |
Period-end allowance allocated to: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 5,437 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,437 | |
Loans evaluated on a collective basis | | 55,484 | | | 5,510 | | | 23,663 | | | 5,058 | | | 4,988 | | | 41,830 | | | 136,533 | |
Ending balance | | $ | 60,921 | | | $ | 5,510 | | | $ | 23,663 | | | $ | 5,058 | | | $ | 4,988 | | | $ | 41,830 | | | $ | 141,970 | |
Period-end loan balances: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 29,030 | | | $ | 787 | | | $ | 7,771 | | | $ | 5,392 | | | $ | 5,803 | | | $ | 2,012 | | | $ | 50,795 | |
Loans evaluated on a collective basis | | 3,078,710 | | | 1,822,442 | | | 3,313,883 | | | 928,932 | | | 764,772 | | | 1,520,584 | | | 11,429,323 | |
Ending balance | | $ | 3,107,740 | | | $ | 1,823,229 | | | $ | 3,321,654 | | | $ | 934,324 | | | $ | 770,575 | | | $ | 1,522,596 | | | $ | 11,480,118 | |
(1)Includes commercial small business leases and PPP loans.
(2)Period-end loan balance excludes reverse mortgages at fair value of $2.6 million.
(3)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(4)Includes $23.5 million initial provision for credit losses on non-PCD loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial(1) | | Owner - occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer(3) | | Total |
Three months ended June 30, 2021 | | | | | | | | | | | | | | |
Allowance for credit losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 125,870 | | | $ | 9,617 | | | $ | 30,545 | | | $ | 14,287 | | | $ | 5,702 | | | $ | 18,797 | | | $ | 204,818 | |
Charge-offs | | (6,512) | | | (45) | | | — | | | — | | | — | | | (521) | | | (7,078) | |
Recoveries | | 1,379 | | | 15 | | | 30 | | | — | | | 455 | | | 362 | | | 2,241 | |
(Credit) provision | | (33,534) | | | (3,406) | | | (14,476) | | | (10,775) | | | (2,864) | | | (2,508) | | | (67,563) | |
Ending balance | | $ | 87,203 | | | $ | 6,181 | | | $ | 16,099 | | | $ | 3,512 | | | $ | 3,293 | | | $ | 16,130 | | | $ | 132,418 | |
Six months ended June 30, 2021 | | | | | | | | | | | | | | |
Allowance for loan losses | | | | | | | | | | | | | | |
Beginning balance, prior to adoption of ASC 326 | | $ | 150,875 | | | $ | 9,615 | | | $ | 31,071 | | | $ | 12,190 | | | $ | 6,893 | | | $ | 18,160 | | | $ | 228,804 | |
Charge-offs | | (11,564) | | | (45) | | | — | | | — | | | — | | | (945) | | | (12,554) | |
Recoveries | | 2,519 | | | 105 | | | 44 | | | — | | | 595 | | | 628 | | | 3,891 | |
(Credit) provision | | (54,627) | | | (3,494) | | | (15,016) | | | (8,678) | | | (4,195) | | | (1,713) | | | (87,723) | |
Ending balance | | $ | 87,203 | | | $ | 6,181 | | | $ | 16,099 | | | $ | 3,512 | | | $ | 3,293 | | | $ | 16,130 | | | $ | 132,418 | |
Period-end allowance allocated to: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 1 | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | — | | | $ | 11 | |
Loans evaluated on a collective basis | | 87,202 | | | 6,181 | | | 16,089 | | | 3,512 | | | 3,293 | | | 16,130 | | | 132,407 | |
Ending balance | | $ | 87,203 | | | $ | 6,181 | | | $ | 16,099 | | | $ | 3,512 | | | $ | 3,293 | | | $ | 16,130 | | | $ | 132,418 | |
Period-end loan balances: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 14,446 | | | $ | 3,868 | | | $ | 3,962 | | | $ | 72 | | | $ | 4,994 | | | $ | 2,608 | | | $ | 29,950 | |
Loans evaluated on a collective basis | | 2,365,251 | | | 1,356,813 | | | 2,020,722 | | | 779,529 | | | 601,064 | | | 1,102,561 | | | 8,225,940 | |
Ending balance | | $ | 2,379,697 | | | $ | 1,360,681 | | | $ | 2,024,684 | | | $ | 779,601 | | | $ | 606,058 | | | $ | 1,105,169 | | | $ | 8,255,890 | |
(1)Includes commercial small business leases and PPP loans.
(2)Period-end loan balance excludes reverse mortgages at fair value of $8.4 million.
(3)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
The following tables show nonaccrual and past due loans presented at amortized cost at the date indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 |
(Dollars in thousands) | | | | 30–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Nonaccrual Loans(1) | | | | Total Loans |
Commercial and industrial(2) | | | | $ | 6,486 | | | $ | 520 | | | $ | 7,006 | | | $ | 3,094,133 | | | $ | 6,601 | | | | | $ | 3,107,740 | |
Owner-occupied commercial | | | | 2,132 | | | — | | | 2,132 | | | 1,820,744 | | | 353 | | | | | 1,823,229 | |
Commercial mortgages | | | | 4,056 | | | 211 | | | 4,267 | | | 3,313,124 | | | 4,263 | | | | | 3,321,654 | |
Construction | | | | 4,348 | | | — | | | 4,348 | | | 924,792 | | | 5,184 | | | | | 934,324 | |
Residential(3) | | | | 5,159 | | | 78 | | | 5,237 | | | 762,765 | | | 2,573 | | | | | 770,575 | |
Consumer(4) | | | | 11,302 | | | 11,085 | | | 22,387 | | | 1,498,172 | | | 2,037 | | | | | 1,522,596 | |
Total | | | | $ | 33,483 | | | $ | 11,894 | | | $ | 45,377 | | | $ | 11,413,730 | | | $ | 21,011 | | | | | $ | 11,480,118 | |
% of Total Loans | | | | 0.30 | % | | 0.10 | % | | 0.40 | % | | 99.42 | % | | 0.18 | % | | | | 100 | % |
(1)There was no allowance on nonaccrual loans as of June 30, 2022.
(2)Includes commercial small business leases and PPP loans.
(3)Residential accruing current balances excludes reverse mortgages at fair value of $2.6 million.
(4)Includes $19.6 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in thousands) | | 30–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Nonaccrual Loans(1) | | | | Total Loans |
Commercial and industrial(2) | | $ | 5,007 | | | $ | 547 | | | $ | 5,554 | | | $ | 2,256,554 | | | $ | 8,211 | | | | | $ | 2,270,319 | |
Owner-occupied commercial | | 741 | | | — | | | 741 | | | 1,340,155 | | | 811 | | | | | 1,341,707 | |
Commercial mortgages | | 3,525 | | | 810 | | | 4,335 | | | 1,875,105 | | | 2,070 | | | | | 1,881,510 | |
Construction | | 7,933 | | | — | | | 7,933 | | | 679,268 | | | 12 | | | | | 687,213 | |
Residential(3) | | 1,856 | | | — | | | 1,856 | | | 537,752 | | | 3,125 | | | | | 542,733 | |
Consumer(4) | | 10,227 | | | 8,634 | | | 18,861 | | | 1,137,332 | | | 2,380 | | | | | 1,158,573 | |
Total(4) | | $ | 29,289 | | | $ | 9,991 | | | $ | 39,280 | | | $ | 7,826,166 | | | $ | 16,609 | | | | | $ | 7,882,055 | |
% of Total Loans | | 0.37 | % | | 0.13 | % | | 0.50 | % | | 99.29 | % | | 0.21 | % | | | | 100 | % |
(1)Nonaccrual loans with an allowance totaled less than $0.1 million
(2)Includes commercial small business leases and PPP loans.
(3)Residential accruing current balances excludes reverse mortgages, at fair value of $3.9 million.
(4)Includes $17.0 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss.
The following table presents the amortized cost basis of nonaccruing collateral-dependent loans by class at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
(Dollars in thousands) | | Property | | | | Equipment and other | | Property | | | | Equipment and other |
Commercial and industrial(1) | | $ | 3,987 | | | | | $ | 2,614 | | | $ | 4,199 | | | | | $ | 4,012 | |
Owner-occupied commercial | | 353 | | | | | — | | | 811 | | | | | — | |
Commercial mortgages | | 4,263 | | | | | — | | | 2,070 | | | | | — | |
Construction | | 5,184 | | | | | — | | | 12 | | | | | — | |
Residential(2) | | 2,573 | | | | | — | | | 3,125 | | | | | — | |
Consumer(3) | | 2,005 | | | | | 32 | | | 2,380 | | | | | — | |
Total | | $ | 18,365 | | | | | $ | 2,646 | | | $ | 12,597 | | | | | $ | 4,012 | |
(1)Includes commercial small business leases.
(2)Excludes reverse mortgages at fair value.
(3)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
Interest income recognized on individually reviewed loans was $0.2 million and $0.3 million during the three and six months ended June 30, 2022, respectively, and $0.2 million and $0.4 million during the three and six months ended June 30, 2021, respectively.
As of June 30, 2022, there were 22 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $2.0 million and $3.3 million, respectively. As of December 31, 2021, there were 28 residential loans and 9 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $2.5 million and $3.2 million, respectively. Loan workout and other real estate owned (OREO) (recoveries) expenses were less than $(0.1) million and $0.2 million during the three and six months ended June 30, 2022, respectively, and $0.2 million and $0.7 million during three and six months ended June 30, 2021, respectively. Loan workout and OREO expenses are included in Loan workout and other credit costs on the Consolidated Statement of Income.
Credit Quality Indicators
Below is a description of each of the risk ratings for all commercial loans:
•Pass. These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible.
•Special Mention. These borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.
•Substandard or Lower. These borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. A distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected. In addition, some borrowers in this category could have the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.
Residential and Consumer Loans
The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.
The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving loans amortized cost basis | | Revolving loans converted to term | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | |
Commercial and industrial(1): | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass(2) | | $ | 492,793 | | | $ | 680,564 | | | $ | 503,154 | | | $ | 343,944 | | | $ | 258,950 | | | $ | 284,041 | | | $ | 7,970 | | | $ | 215,231 | | | $ | 2,786,647 | |
Special mention | | 28,344 | | | 38,417 | | | 8,791 | | | 9,304 | | | 6,493 | | | 1,234 | | | — | | | 19,939 | | | 112,522 | |
Substandard or Lower | | 11,285 | | | 20,119 | | | 15,134 | | | 70,613 | | | 38,871 | | | 45,005 | | | 10 | | | 7,534 | | | 208,571 | |
| | $ | 532,422 | | | $ | 739,100 | | | $ | 527,079 | | | $ | 423,861 | | | $ | 304,314 | | | $ | 330,280 | | | $ | 7,980 | | | $ | 242,704 | | | $ | 3,107,740 | |
Owner-occupied commercial: | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 133,004 | | | $ | 377,379 | | | $ | 255,167 | | | $ | 256,339 | | | $ | 162,461 | | | $ | 409,964 | | | $ | — | | | $ | 144,921 | | | $ | 1,739,235 | |
Special mention | | — | | | 920 | | | 6,994 | | | — | | | 1,278 | | | 7,335 | | | — | | | 3,467 | | | 19,994 | |
Substandard or Lower | | 1,166 | | | 4,023 | | | 20,120 | | | 4,540 | | | 12,956 | | | 8,241 | | | — | | | 12,954 | | | 64,000 | |
| | $ | 134,170 | | | $ | 382,322 | | | $ | 282,281 | | | $ | 260,879 | | | $ | 176,695 | | | $ | 425,540 | | | $ | — | | | $ | 161,342 | | | $ | 1,823,229 | |
Commercial mortgages: | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 208,322 | | | $ | 680,573 | | | $ | 556,456 | | | $ | 565,068 | | | $ | 280,557 | | | $ | 711,412 | | | $ | — | | | $ | 201,214 | | | $ | 3,203,602 | |
Special mention | | 6,225 | | | 1,620 | | | 14,750 | | | 6,281 | | | 3,527 | | | 37,184 | | | — | | | 4,057 | | | 73,644 | |
Substandard or Lower | | 748 | | | 5,139 | | | 13,552 | | | 3,617 | | | 4,149 | | | 16,946 | | | — | | | 257 | | | 44,408 | |
| | $ | 215,295 | | | $ | 687,332 | | | $ | 584,758 | | | $ | 574,966 | | | $ | 288,233 | | | $ | 765,542 | | | $ | — | | | $ | 205,528 | | | $ | 3,321,654 | |
Construction: | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 195,969 | | | $ | 349,705 | | | $ | 208,881 | | | $ | 20,770 | | | $ | 45,782 | | | $ | 9,586 | | | $ | — | | | $ | 95,611 | | | $ | 926,304 | |
Special mention | | — | | | 603 | | | — | | | — | | | — | | | — | | | — | | | — | | | 603 | |
Substandard or Lower | | 2,025 | | | 4,408 | | | — | | | 197 | | | — | | | — | | | — | | | 787 | | | 7,417 | |
| | $ | 197,994 | | | $ | 354,716 | | | $ | 208,881 | | | $ | 20,967 | | | $ | 45,782 | | | $ | 9,586 | | | $ | — | | | $ | 96,398 | | | $ | 934,324 | |
Residential(3): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 24,777 | | | $ | 117,528 | | | $ | 62,225 | | | $ | 39,318 | | | $ | 52,955 | | | $ | 467,969 | | | $ | — | | | $ | — | | | $ | 764,772 | |
Nonperforming(4) | | — | | | 568 | | | 505 | | | 1,587 | | | 124 | | | 3,019 | | | — | | | — | | | 5,803 | |
| | $ | 24,777 | | | $ | 118,096 | | | $ | 62,730 | | | $ | 40,905 | | | $ | 53,079 | | | $ | 470,988 | | | $ | — | | | $ | — | | | $ | 770,575 | |
Consumer(5): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 258,696 | | | $ | 222,594 | | | $ | 141,316 | | | $ | 61,751 | | | $ | 208,705 | | | $ | 84,737 | | | $ | 537,619 | | | $ | 5,150 | | | $ | 1,520,568 | |
Nonperforming(6) | | — | | | — | | | 351 | | | — | | | 545 | | | — | | | 860 | | | 272 | | | 2,028 | |
| | $ | 258,696 | | | $ | 222,594 | | | $ | 141,667 | | | $ | 61,751 | | | $ | 209,250 | | | $ | 84,737 | | | $ | 538,479 | | | $ | 5,422 | | | $ | 1,522,596 | |
(1)Includes commercial small business leases.
(2)Includes $5.2 million of PPP loans.
(3)Excludes reverse mortgages at fair value.
(4)Includes troubled debt restructured mortgages performing in accordance with the loans' modified terms and accruing interest.
(5)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(6)Includes troubled debt restructured home equity installment loans performing in accordance with the loans' modified terms and accruing interest.
The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving loans amortized cost basis | | Revolving loans converted to term | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | |
Commercial and industrial(1): | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass(2) | | $ | 556,896 | | | $ | 420,698 | | | $ | 329,354 | | | $ | 273,345 | | | $ | 139,800 | | | $ | 148,809 | | | $ | 5,551 | | | $ | 176,006 | | | $ | 2,050,459 | |
Special mention | | 35,910 | | | 949 | | | 3,052 | | | 1,057 | | | 429 | | | 15,299 | | | — | | | 17,545 | | | 74,241 | |
Substandard or Lower | | 12,533 | | | 14,408 | | | 53,655 | | | 29,046 | | | 19,114 | | | 6,921 | | | 29 | | | 9,913 | | | 145,619 | |
| | $ | 605,339 | | | $ | 436,055 | | | $ | 386,061 | | | $ | 303,448 | | | $ | 159,343 | | | $ | 171,029 | | | $ | 5,580 | | | $ | 203,464 | | | $ | 2,270,319 | |
Owner-occupied commercial: | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 305,156 | | | $ | 189,128 | | | $ | 172,503 | | | $ | 67,526 | | | $ | 136,697 | | | $ | 262,629 | | | $ | — | | | $ | 128,188 | | | $ | 1,261,827 | |
Special mention | | 938 | | | 5,359 | | | 2,561 | | | 891 | | | — | | | 7,019 | | | — | | | 10,543 | | | 27,311 | |
Substandard or Lower | | 3,192 | | | 13,736 | | | 4,138 | | | 9,418 | | | 5,580 | | | 11,039 | | | — | | | 5,466 | | | 52,569 | |
| | $ | 309,286 | | | $ | 208,223 | | | $ | 179,202 | | | $ | 77,835 | | | $ | 142,277 | | | $ | 280,687 | | | $ | — | | | $ | 144,197 | | | $ | 1,341,707 | |
Commercial mortgages: | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 416,149 | | | $ | 280,889 | | | $ | 217,311 | | | $ | 134,477 | | | $ | 229,863 | | | $ | 368,527 | | | $ | — | | | $ | 187,396 | | | $ | 1,834,612 | |
Special mention | | — | | | 4,185 | | | — | | | 861 | | | 11,588 | | | 1,385 | | | — | | | 2,097 | | | 20,116 | |
Substandard or Lower | | 2,438 | | | 1,624 | | | 3,789 | | | 2,114 | | | 2,254 | | | 14,085 | | | — | | | 478 | | | 26,782 | |
| | $ | 418,587 | | | $ | 286,698 | | | $ | 221,100 | | | $ | 137,452 | | | $ | 243,705 | | | $ | 383,997 | | | $ | — | | | $ | 189,971 | | | $ | 1,881,510 | |
Construction: | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 248,053 | | | $ | 195,269 | | | $ | 84,868 | | | $ | 39,585 | | | $ | 2,223 | | | $ | 11,297 | | | $ | — | | | $ | 88,839 | | | $ | 670,134 | |
| | | | | | | | | | | | | | | | | | |
Substandard or Lower | | 12,922 | | | — | | | 2,422 | | | — | | | 90 | | | — | | | — | | | 1,645 | | | 17,079 | |
| | $ | 260,975 | | | $ | 195,269 | | | $ | 87,290 | | | $ | 39,585 | | | $ | 2,313 | | | $ | 11,297 | | | $ | — | | | $ | 90,484 | | | $ | 687,213 | |
Residential(3): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 59,977 | | | $ | 28,426 | | | $ | 12,526 | | | $ | 32,871 | | | $ | 44,969 | | | $ | 358,964 | | | $ | — | | | $ | — | | | $ | 537,733 | |
Nonperforming(4) | | — | | | 112 | | | 1,044 | | | — | | | 63 | | | 3,781 | | | — | | | — | | | 5,000 | |
| | $ | 59,977 | | | $ | 28,538 | | | $ | 13,570 | | | $ | 32,871 | | | $ | 45,032 | | | $ | 362,745 | | | $ | — | | | $ | — | | | $ | 542,733 | |
Consumer(5): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 219,918 | | | $ | 169,922 | | | $ | 74,048 | | | $ | 203,519 | | | $ | 39,113 | | | $ | 60,952 | | | $ | 382,718 | | | $ | 5,364 | | | $ | 1,155,554 | |
Nonperforming(6) | | — | | | 147 | | | — | | | 600 | | | 71 | | | — | | | 1,655 | | | 546 | | | 3,019 | |
| | $ | 219,918 | | | $ | 170,069 | | | $ | 74,048 | | | $ | 204,119 | | | $ | 39,184 | | | $ | 60,952 | | | $ | 384,373 | | | $ | 5,910 | | | $ | 1,158,573 | |
(1)Includes commercial small business leases.
(2)Includes $31.5 million of PPP loans.
(3)Excludes reverse mortgages at fair value.
(4)Includes troubled debt restructured mortgages performing in accordance with the loans' modified terms and accruing interest.
(5)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(6)Includes troubled debt restructured home equity installment loans performing in accordance with the loans' modified terms and accruing interest.
Troubled Debt Restructurings (TDRs)
The following table presents the balance of TDRs as of the indicated dates:
| | | | | | | | | | | | | | |
| | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Performing TDRs | | $ | 12,484 | | | $ | 14,204 | |
Nonperforming TDRs | | 587 | | | 756 | |
Total TDRs | | $ | 13,071 | | | $ | 14,960 | |
Approximately $0.2 million in related reserves have been established for these loans at June 30, 2022 and December 31, 2021.
The following tables present information regarding the types of loan modifications made for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2022 | | Six months ended June 30, 2022 |
| | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total |
Commercial and industrial | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Residential | | — | | | — | | | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | | | — | | | 2 | |
Consumer | | — | | | 26 | | | 1 | | | — | | | 27 | | | 1 | | | 26 | | | 3 | | | 1 | | | 31 | |
Total | | — | | | 26 | | | 2 | | | — | | | 28 | | | 3 | | | 26 | | | 4 | | | 1 | | | 34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2021 | | Six months ended June 30, 2021 |
| | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Residential | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
Consumer | | — | | | — | | | 3 | | | 1 | | | 4 | | | — | | | — | | | 20 | | | 1 | | | 21 | |
Total | | — | | | — | | | 3 | | | 1 | | | 4 | | | — | | | — | | | 22 | | | 1 | | | 23 | |
| | | | | | | | | | | | | | | | | | | | |
(1)Other includes interest rate reduction, forbearance, and interest only payments.
Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, which is typically six months, and repayment is reasonably assured. The following tables present loans modified as TDRs during the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | | | | | Six Months Ended June 30, 2022 | | | | |
| | | | | | | | |
(Dollars in thousands) | | Pre Modification | | Post Modification | | | | | | Pre Modification | | Post Modification | | | | |
Commercial | | $ | — | | | $ | — | | | | | | | $ | (19) | | | $ | (19) | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Residential | | 134 | | | 134 | | | | | | | 139 | | | 139 | | | | | |
Consumer | | 281 | | | 281 | | | | | | | 463 | | | 463 | | | | | |
Total(1)(2) | | $ | 415 | | | $ | 415 | | | | | | | $ | 583 | | | $ | 583 | | | | | |
(1)During the three and six months ended June 30, 2022, the TDRs set forth in the table above resulted in a less than $0.1 million increase and a $0.2 million increase in the allowance for credit losses, respectively, and no additional charge-offs in either period. During the three and six months ended June 30, 2022, no TDRs defaulted that had received troubled debt modification during the past twelve months.
(2)The TDRs set forth in the table above did not occur as a result of the loan forbearance program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | | | |
(Dollars in thousands) | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Residential | | $ | — | | | $ | — | | | $ | 166 | | | $ | 166 | |
Consumer | | 155 | | | 155 | | | 839 | | | 839 | |
Total(1)(2) | | $ | 155 | | | $ | 155 | | | $ | 1,005 | | | $ | 1,005 | |
(1)During the three and six months ended June 30, 2021 the TDRs set forth in the table above resulted in a less than $0.1 million increase in the allowance for credit losses for both periods, and no additional charge-offs in either period. During the three and six months ended June 30, 2021, no TDRs defaulted that had received troubled debt modification during the past twelve months.
(2)The TDRs set forth in the table above did not occur as a result of the loan forbearance program under the CARES Act.
9. LEASES
As a lessee, the Company enters into leases for its bank branches, corporate offices, and certain equipment. As a lessor, the Company primarily provides financing through its equipment leasing business.
Lessee
The Company's ongoing leases have remaining lease terms of less than one year to 40 years, which includes renewal options that are exercised at its discretion. The Company's lease terms to calculate the lease liability and right of use asset include options to extend the lease when it is reasonably certain that the Company will exercise the option. The lease liability and right-of-use asset is included in Other liabilities and Other assets, respectively, in the unaudited Consolidated Statement of Financial Condition. Leases with an initial term of 12 months or less are not recorded on the unaudited Consolidated Statement of Financial Condition. Lease expense is recognized on a straight-line basis over the lease term. Operating lease expense is included in Occupancy expense in the unaudited Consolidated Statement of Income. The Company accounts for lease components separately from nonlease components. The Company subleases certain real estate to third parties.
The components of operating lease cost were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
(Dollars in thousands) | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Operating lease cost (1) | | $ | 5,039 | | | $ | 4,789 | | | $ | 10,389 | | | $ | 9,443 | |
Sublease income | | (84) | | | (90) | | | (171) | | | (197) | |
Net lease cost | | $ | 4,954 | | | $ | 4,699 | | | $ | 10,218 | | | $ | 9,246 | |
(1)Includes variable lease cost and short-term lease cost.
Supplemental balance sheet information related to operating leases was as follows: | | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
| | | | |
Right-of-use assets | | $ | 144,888 | | | $ | 144,134 | |
| | | | |
| | | | |
| | | | |
Lease liabilities | | $ | 165,584 | | | $ | 159,526 | |
| | | | |
| | | | |
Lease term and discount rate | | | | |
| | | | |
Weighted average remaining lease term (in years) | | 17.72 | | 19.17 |
| | | | |
Weighted average discount rate | | 4.22 | % | | 4.27 | % |
Maturities of operating lease liabilities were as follows: | | | | | | | | |
(Dollars in thousands) | | June 30, 2022 |
Remaining in 2022 | | $ | 9,806 | |
2023 | | 19,877 | |
2024 | | 18,589 | |
2025 | | 18,585 | |
2026 | | 14,816 | |
After 2026 | | 169,697 | |
Total lease payments | | 251,370 | |
Less: Interest | | (85,786) | |
Present value of lease liabilities | | $ | 165,584 | |
| | |
| | |
Supplemental cash flow information related to operating leases was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
(Dollars in thousands) | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases | | $ | 5,063 | | | $ | 4,693 | | | $ | 10,714 | | | $ | 9,074 | |
Right of use assets obtained in exchange for new operating lease liabilities (non-cash) | | — | | | — | | | 13,707 | | | — | |
In connection with the BMBC Merger, the Company initiated a branch optimization initiative for the combined locations of the legacy companies. During the three and six months ended June 30, 2022, the Company recorded $4.3 million of accelerated right-of-use asset amortization expense due to asset impairment for the leased locations to be terminated.
As of June 30, 2022, the Corporation had not entered into any material leases that have not yet commenced.
Lessor Equipment Leasing
The Company provides equipment and small business lease financing through its leasing subsidiary, NewLane Finance®. Interest income from direct financing leases where the Company is a lessor is recognized in Interest and fees on loans and leases on the Consolidated Statements of Income. The allowance for credit losses on finance leases is included in Provision for (recovery of) credit losses on the Consolidated Statements of Income.
The components of direct finance lease income are summarized in the table below: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
(Dollars in thousands) | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Direct financing leases: | | | | | | | | |
Interest income on lease receivable | | $ | 10,326 | | | $ | 5,102 | | | $ | 20,063 | | | $ | 9,726 | |
Interest income on deferred fees and costs, net | | (953) | | | (438) | | | (1,497) | | | (756) | |
Total direct financing lease net interest income | | $ | 9,373 | | | $ | 4,664 | | | $ | 18,566 | | | $ | 8,970 | |
Equipment leasing receivables relate to direct financing leases. The composition of the net investment in direct financing leases was as follows: | | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Lease receivables | | $ | 584,381 | | | $ | 399,688 | |
Unearned income | | (81,739) | | | (55,066) | |
Deferred fees and costs | | 10,161 | | | 7,654 | |
Net investment in direct financing leases | | $ | 512,803 | | | $ | 352,276 | |
10. GOODWILL AND INTANGIBLE ASSETS
In accordance with ASC 805, Business Combinations (ASC 805) and ASC 350, Intangibles - Goodwill and Other (ASC 350), all assets acquired and liabilities assumed in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value as of acquisition date.
WSFS performs its annual goodwill impairment test on October 1 or more frequently if events and circumstances indicate that the fair value of a reporting unit is less than its carrying value. In between annual tests, management performs a qualitative review of goodwill quarterly as part of the Company's review of the overall business to ensure no events or circumstances have occurred that would impact its goodwill evaluation. During the six months ended June 30, 2022, management determined based on its qualitative assessment that it is not more likely than not that the fair values of our reporting units are less than their carrying values. No goodwill impairment exists during the six months ended June 30, 2022.
The following table shows the allocation of goodwill to the reportable operating segments for purposes of goodwill impairment testing:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | WSFS Bank | | Cash Connect | | Wealth Management | | Consolidated Company |
December 31, 2021 | $ | 452,629 | | | $ | — | | | $ | 20,199 | | | $ | 472,828 | |
Goodwill from business combinations | 297,646 | | | — | | | 116,691 | | | 414,337 | |
Goodwill adjustments(1) | 2,790 | | | — | | | (6,839) | | | (4,049) | |
June 30, 2022 | $ | 753,065 | | | $ | — | | | $ | 130,051 | | | $ | 883,116 | |
(1)Goodwill adjustments include the remeasurements as noted in Note 3 and Wealth Management includes the impact of the sale of the BMTIA business.
ASC 350 requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. The following table summarizes the Company's intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Gross Intangible Assets | | Accumulated Amortization | | Net Intangible Assets | | Amortization Period |
June 30, 2022 | | | | | | | |
Core deposits | $ | 104,751 | | | $ | (35,277) | | | $ | 69,474 | | | 10 years |
Customer relationships | 68,281 | | | (10,406) | | | 57,875 | | | 7-15 years |
Non-compete agreements | 200 | | | (100) | | | 100 | | | 1 year |
Tradename | 2,900 | | | — | | | 2,900 | | | indefinite |
Loan servicing rights(1) | 10,637 | | | (4,245) | | | 6,392 | | | 10-25 years |
Total intangible assets | $ | 186,769 | | | $ | (50,028) | | | $ | 136,741 | | | |
December 31, 2021 | | | | | | | |
Core deposits | $ | 93,811 | | | $ | (30,103) | | | $ | 63,708 | | | 10 years |
Customer relationships | 15,281 | | | (7,876) | | | 7,405 | | | 7-15 years |
| | | | | | | |
Loan servicing rights(2) | 6,671 | | | (3,381) | | | 3,290 | | | 10-25 years |
Total intangible assets | $ | 115,763 | | | $ | (41,360) | | | $ | 74,403 | | | |
(1)Includes impairment losses of $0.1 million for the three and six months ended June 30, 2022.
(2)Includes reversal of impairment losses of $0.3 million for the year ended December 31, 2021
In connection with the BMBC Merger on January 1, 2022, the Company recorded $10.9 million of core deposit intangibles, $53.0 million of customer relationships, $2.9 million for the Bryn Mawr Trust tradename, $0.2 million in non-compete agreements, and $3.3 million of loan servicing rights. See Note 3 to the unaudited Consolidated Financial Statements for additional information on intangible assets recorded in connection with the BMBC Merger.
The Company recognized amortization expense on intangible assets of $3.9 million and $7.9 million for the three and six months ended June 30, 2022, compared to $2.7 million and $5.3 million or the three and six months ended June 30, 2021.
The following table presents the estimated future amortization expense on definite life intangible assets:
| | | | | |
(Dollars in thousands) | June 30, 2022 |
Remaining in 2022 | $ | 8,452 | |
2023 | 16,532 | |
2024 | 16,269 | |
2025 | 15,932 | |
2026 | 15,269 | |
Thereafter | 61,387 | |
Total | $ | 133,841 | |
Servicing Assets
The Company records mortgage servicing rights on its mortgage loan servicing portfolio, which includes mortgages that it acquires or originates as well as mortgages that it services for others, and servicing rights on Small Business Administration (SBA) loans. Mortgage servicing rights and SBA loan servicing rights are included are in Intangible assets in the accompanying Consolidated Statements of Financial Condition. Mortgage loans which the Company services for others are not included in Loans and leases, net of allowance in the accompanying Consolidated Statements of Financial Condition. Servicing rights represent the present value of the future net servicing fees from servicing mortgage loans the Company acquires or originates, or that it services for others.
The value of the Company's mortgage servicing rights was $2.3 million and $0.5 million at June 30, 2022 and December 31, 2021, respectively, and the value of its SBA loan servicing rights was $4.1 million and $2.8 million at June 30, 2022 and December 31, 2021, respectively. In connection with the BMBC Merger, the Company acquired $2.0 million of mortgage servicing rights and $1.3 million of SBA loan servicing rights. Changes in the value of these servicing rights resulted in impairment losses of $0.1 million for the three and six months ended June 30, 2022 and impairment losses of $0.1 million and less than $0.1 million for the three and six months ended June 30, 2021. Revenues from originating, marketing and servicing mortgage loans as well as valuation adjustments related to capitalized mortgage servicing rights are included in Mortgage banking activities, net in the Consolidated Statements of Income and revenues from the Company's SBA loan servicing rights are included in Loan and lease fee income in the Consolidated Statements of Income.
Besides the impairment on loan servicing rights noted above, there was no impairment of other intangible assets as of June 30, 2022 or December 31, 2021. Changing economic conditions that may adversely affect the Company's performance and could result in impairment, which could adversely affect earnings in the future.
11. DEPOSITS
The following table shows deposits by category: | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Noninterest-bearing: | | | | |
| Noninterest demand | | $ | 6,551,542 | | | $ | 4,565,143 | |
| | Total noninterest-bearing | | $ | 6,551,542 | | | $ | 4,565,143 | |
| | | | | | |
Interest-bearing: | | | | |
| Interest-bearing demand | | $ | 3,395,951 | | | $ | 2,793,279 | |
| Savings | | 2,313,240 | | | 1,970,744 | |
| Money market | | 3,881,914 | | | 2,906,260 | |
| | | | | | |
| Customer time deposits | | 1,104,022 | | | 988,974 | |
| Brokered deposits | | 22,938 | | | 15,662 | |
| | Total interest-bearing | | 10,718,065 | | | 8,674,919 | |
| | Total deposits | | $ | 17,269,607 | | | $ | 13,240,062 | |
12. BORROWED FUNDS
The following is a summary of borrowed funds by type as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
(Dollars in thousands) | June 30, 2022 | | December 31, 2021 |
| | | |
| | | |
Trust preferred borrowings | $ | 90,344 | | | $ | 67,011 | |
Senior and subordinated debt | 248,372 | | | 147,939 | |
Other borrowed funds | 31,067 | | | 24,527 | |
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
The Company may utilize federal funds as a short-term funding source. The Company had no securities sold under agreements to repurchase at June 30, 2022 and December 31, 2021.
Federal Home Loan Bank Advances
The Company had no FHLB Advances at June 30, 2022 and December 31, 2021.
Pursuant to collateral agreements with the FHLB, advances are secured by qualifying loan collateral, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. As a member of the FHLB, the Company is required to purchase and hold shares of capital stock in the FHLB and was in compliance with this requirement with a stock investment in FHLB of $10.1 million at June 30, 2022 and $6.1 million at December 31, 2021. This stock is carried on the accompanying Consolidated Statements of Financial Condition at cost, which approximates liquidation value.
The Company received dividends on its stock investment in FHLB of less than $0.1 million for the three and six months ended June 30, 2022, and less than $0.1 million for the three and six months ended June 30, 2021.
Trust Preferred Borrowings
In 2005, the Company issued $67.0 million of aggregate principal amount of Pooled Floating Rate Securities at a variable interest rate of 177 basis points over the three-month LIBOR rate. These securities are currently callable and have a maturity date of June 1, 2035.
In connection with the BMBC Merger, WSFS acquired Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the Trusts), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although WSFS owns an aggregate of $774.0 thousand of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Corporation’s Consolidated Financial Statements as the Corporation is not deemed to be the primary beneficiary of these entities. Inclusive of the fair value marks, WSFS assumed junior subordinated debentures to the Trusts with a carrying value of $11.7 million each, totaling $23.3 million. The junior subordinated debentures incur interest at a coupon rate of 2.98% as of June 30, 2022. The rate resets quarterly based on 3-month LIBOR plus 2.15%.
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each Trust to an unaffiliated investment vehicle and an aggregate principal amount of $387.0 thousand of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each Trust to the Company. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
The rights of holders of common securities of the Trusts are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of the Trusts are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, the Trusts will dissolve on December 15, 2034. The junior subordinated debentures are the sole assets of Trusts, mature on December 15, 2034, and may be called at par by the Company any time. The Company records its investments in the Trusts’ common securities of $387.0 thousand each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II.
Senior and Subordinated Debt
On June 13, 2016, the Company issued $100.0 million of senior notes due 2026 (the 2026 Notes). The 2026 Notes had a fixed coupon rate of 4.50% from issuance to but excluding June 15, 2021 and a variable coupon rate of three month LIBOR plus 3.30% from June 15, 2021 until maturity. The 2026 Notes were redeemed on June 15, 2021 at 100% of principal plus accrued and unpaid interest using cash on hand.
On December 3, 2020, the Company issued $150.0 million of senior notes due 2030 (the 2030 Notes). The 2030 Notes mature on December 15, 2030 and have a fixed coupon rate of 2.75% from issuance until December 15, 2025 and a variable coupon rate equal to the three-month term SOFR, reset quarterly, plus 2.485% from December 15, 2025 until maturity. The 2030 Notes may be redeemed beginning December 15, 2025 at 100% of principal plus accrued and unpaid interest. The remaining net proceeds from the issuance of the 2030 Notes are being used for general corporate purposes, including, but not limited to, financing organic growth, acquisitions, repurchases of common stock, and redemption of outstanding indebtedness. The carrying value of the 2030 Notes, inclusive of deferred issuance costs, was $148.1 million as of June 30, 2022.
In connection with the BMBC Merger, the Company assumed $30.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 (the 2025 Notes) which were issued in a private placement to institutional accredited investors on August 6, 2015. The 2025 Notes mature on August 15, 2025, and currently bear interest at a variable rate that resets quarterly to a level equal to the then-current three-month LIBOR rate plus 3.068% until August 15, 2025, or any early redemption date. The interest rate of the 2025 Notes was 4.897% as of June 30, 2022. The carrying value of the 2025 Notes, inclusive of purchase accounting marks, was $30.0 million as of June 30, 2022.
In connection with the BMBC Merger, the Company assumed $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027 (the 2027 Notes) which were issued by BMBC in an underwritten public offering on December 13, 2017. The 2027 Notes mature on December 15, 2027, and currently bear interest at an annual fixed rate of 4.25% until and including December 14, 2022, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 2.05% until December 15, 2027, or any early redemption date. The carrying value of the 2027 Notes, inclusive of purchase accounting marks, was $70.3 million as of June 30, 2022.
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $31.1 million and $24.5 million at June 30, 2022 and December 31, 2021, respectively, consisting of outstanding retail repurchase agreements, contractual arrangements under which portions of certain securities are sold overnight to retail customers under agreements to repurchase. Such borrowings were collateralized by mortgage-backed securities.
Borrower in Custody
The Company had $233.5 million and $282.1 million of loans and securities pledged to the Federal Reserve of Philadelphia (FRB) at June 30, 2022 and December 31, 2021, respectively. The Company did not borrow funds from the FRB during the three and six months ended June 30, 2022 or 2021.
13. INCOME TAXES
There were no unrecognized tax benefits as of June 30, 2022. The Company records interest and penalties on potential income tax deficiencies as income tax expense. The Company's federal and state tax returns for the 2018 through 2021 tax years are subject to examination as of June 30, 2022. The Company does not expect to record or realize any material unrecognized tax benefits during 2022.
The amortization of the low-income housing credit investments has been reflected as income tax expense of $1.2 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, and $2.4 million and $1.8 million of such amortization has been reflected as income tax expense for the six months ended June 30, 2022 and 2021, respectively.
The amount of affordable housing tax credits, amortization, and tax benefits recorded as income tax expense for the six months ended June 30, 2022 were $2.1 million, $2.4 million and $0.6 million, respectively. The carrying value of the investment in affordable housing credits is $37.2 million at June 30, 2022, compared to $39.6 million at December 31, 2021.
14. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
ASC 820-10, Fair Value Measurement (ASC 820-10) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
•Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following tables present financial instruments carried at fair value as of June 30, 2022 and December 31, 2021 by level in the valuation hierarchy (as described above):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
(Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets measured at fair value on a recurring basis: | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
CMO | | $ | — | | | $ | 557,655 | | | $ | — | | | $ | 557,655 | |
FNMA MBS | | — | | | 3,592,458 | | | — | | | 3,592,458 | |
FHLMC MBS | | — | | | 116,396 | | | — | | | 116,396 | |
GNMA MBS | | — | | | 39,161 | | | — | | | 39,161 | |
GSE agency notes | | — | | | 190,417 | | | — | | | 190,417 | |
| | | | | | | | |
Other assets | | — | | | 102,109 | | | 87 | | | 102,196 | |
Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 4,598,196 | | | $ | 87 | | | $ | 4,598,283 | |
| | | | | | | | |
Liabilities measured at fair value on a recurring basis: | | | | | | | | |
Other liabilities | | $ | — | | | $ | 100,579 | | | $ | 17,560 | | | $ | 118,139 | |
| | | | | | | | |
Assets measured at fair value on a nonrecurring basis: | | | | | | | | |
Other investments | | $ | — | | | $ | — | | | $ | 21,064 | | | $ | 21,064 | |
Other real estate owned | | — | | | — | | | 358 | | | 358 | |
Loans held for sale | | — | | | 60,775 | | | — | | | 60,775 | |
| | | | | | | | |
Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 60,775 | | | $ | 21,422 | | | $ | 82,197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets measured at fair value on a recurring basis: | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
CMO | | $ | — | | | $ | 575,766 | | | $ | — | | | $ | 575,766 | |
FNMA MBS | | — | | | 4,245,684 | | | — | | | 4,245,684 | |
FHLMC MBS | | — | | | 145,528 | | | — | | | 145,528 | |
GNMA MBS | | — | | | 17,936 | | | — | | | 17,936 | |
GSE agency notes | | — | | | 220,397 | | | — | | | 220,397 | |
| | | | | | | | |
Other assets | | — | | | 5,153 | | | — | | | 5,153 | |
Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 5,210,464 | | | $ | — | | | $ | 5,210,464 | |
| | | | | | | | |
Liabilities measured at fair value on a recurring basis: | | | | | | | | |
Other liabilities | | $ | — | | | $ | 3,039 | | | $ | 20,252 | | | $ | 23,291 | |
| | | | | | | | |
Assets measured at fair value on a nonrecurring basis | | | | | | | | |
Other investments | | $ | — | | | $ | — | | | $ | 10,518 | | | $ | 10,518 | |
Other real estate owned | | — | | | — | | | 2,320 | | | 2,320 | |
Loans held for sale | | — | | | 113,349 | | | — | | | 113,349 | |
| | | | | | | | |
Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 113,349 | | | $ | 12,838 | | | $ | 126,187 | |
Fair value is based on quoted market prices, where available. If such quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Available-for-sale securities
Securities classified as available-for-sale are reported at fair value using Level 2 inputs. The Company believes that this Level 2 designation is appropriate under ASC 820-10, as these securities are GSEs and GNMA securities with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.
Other investments
Other investments includes equity investments with and without readily determinable fair values and equity method investments, which are categorized as Level 3. The Company's equity investments with a readily determinable fair value are held at fair value. The Company’s equity investments without readily determinable fair values are held at cost, and are adjusted for any observable transactions during the reporting period and its equity method investments are initially recorded at cost based on the Company’s percentage ownership in the investee, and are adjusted to reflect the recognition of the Company’s proportionate share of income or loss of the investee based on the investee’s earnings.
Other real estate owned
Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of other real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.
Loans held for sale
The fair value of loans held for sale is based on estimates using Level 2 inputs. These inputs are based on pricing information obtained from wholesale mortgage banks and brokers and applied to loans with similar interest rates and maturities.
Other assets
Other assets include the fair value of interest rate products, derivatives on the residential mortgage held for sale loan pipeline, and risk participation agreements. Valuation of interest rate products is obtained from an independent pricing service and also from the derivative counterparty. Valuation of the derivative related to the residential mortgage held for sale loan pipeline is based on valuation of the loans held for sale portfolio as described above in Loans held for sale. Valuation of risk participation agreements are obtained from an independent pricing service.
Other liabilities
Other liabilities include the fair value of interest rate products, derivatives on the residential mortgage held for sale loan pipeline, foreign exchange forward contracts, risk participation agreements, and derivative related to the sale of certain Visa Class B common shares. Valuation of interest rate products is obtained from an independent pricing service and also from the derivative counterparty. Valuation of the derivative related to the residential mortgage held for sale loan pipeline is based on valuation of the loans held for sale portfolio as described above in Loans held for sale. Valuation of foreign exchange forward contracts and risk participation agreements are obtained from an independent pricing service. Valuation of the derivative related to the sale of certain Visa Class B common shares is based on: (i) the agreed upon graduated fee structure; (ii) the length of time until the resolution of the Visa covered litigation; and (iii) the estimated impact of dilution in the conversion ratio of Class B shares resulting from changes in the Visa covered litigation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash, cash equivalents, and restricted cash
For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.
Investment securities
Investment securities include debt securities classified as held-to-maturity or available-for-sale. Fair value is estimated using quoted prices for similar securities, which the Company obtains from a third party vendor. The Company uses one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by the Company to validate the vendor’s methodology as described above in available-for-sale securities.
Other investments
Other investments includes equity investments with and without readily determinable fair values (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans held for sale
Loans held for sale are carried at their fair value (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans and leases
Loans and leases are segregated by portfolio segments with similar financial characteristics. The fair values of loans and leases, with the exception of reverse mortgages, are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair values of reverse mortgages are based on the net present value of the expected cash flows using a discount rate specific to the reverse mortgages portfolio. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral, if the loan is collateral dependent. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are used if appraisals are not available. This technique does contemplate an exit price.
Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh
The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.
Accrued interest receivable
The carrying amounts of interest receivable approximate fair value.
Other assets
Other assets include the fair value of interest rate products, derivatives on the residential mortgage held for sale loan pipeline, and risk participation agreements (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.
Borrowed funds
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Off-balance sheet instruments
The fair value of off-balance sheet instruments, including swap guarantees of $12.0 million at June 30, 2022 and $13.1 million at December 31, 2021, respectively, and standby letters of credit, approximates the recorded net deferred fee amounts. Because letters of credit are generally not assignable by either the Company or the borrower, they only have value to the Company and the borrower. In determining the fair value of the swap guarantees, the Company assesses the underlying credit risk exposure for each borrower in a paying position to the third-party financial institution.
Accrued interest payable
The carrying amounts of interest payable approximate fair value.
Other liabilities
Other liabilities include the fair value of interest rate products, derivatives on the residential mortgage held for sale loan pipeline, foreign exchange forward contracts, risk participation agreements, and derivative related to the sale of certain Visa Class B common shares (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Financial instruments measured at fair value using significant unobservable inputs (Level 3)
The following table provides a description of the valuation technique and significant unobservable inputs for the Company's financial instruments classified as Level 3:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 |
Financial Instrument | | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range (Weighted Average) |
Other investments | | $ | 21,064 | | | Observed market comparable transactions | | Period of observed transactions | | May 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other real estate owned | | 358 | | | Fair market value of collateral | | Costs to sell | | 10.0% |
Other assets (Risk participation agreements purchased) | | 87 | | Credit Value Adjustment | | CDS Spread and Loss Given Default (LGD) | | CDS spread: 110 - 250 bps LGD: 30% |
Other liabilities (Risk participation agreements sold) | | 4 | | | Credit Value Adjustment | | CDS Spread and Loss Given Default (LGD) | | CDS spread: 1 - 250 bps LGD: 30% |
Other liabilities (Financial derivatives related to sales of certain Visa Class B shares) | | 17,556 | | | Discounted cash flow | | Timing of Visa litigation resolution | | 1.25 - 6.25 years (4.00 years or 4Q 2025) |
| | | | | | | | |
| | | | | | | | |
The book value and estimated fair value of the Company's financial instruments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
(Dollars in thousands) | | Fair Value Measurement | | Book Value | | Fair Value | | Book Value | | Fair Value |
Financial assets: | | | | | | | | | | |
Cash, cash equivalents, and restricted cash | | Level 1 | | $ | 1,676,609 | | | $ | 1,676,609 | | | $ | 1,532,939 | | | $ | 1,532,939 | |
Investment securities available-for-sale | | Level 2 | | 4,496,087 | | | 4,496,087 | | | 5,205,311 | | | 5,205,311 | |
Investment securities held-to-maturity, net | | Level 2 | | 1,064,182 | | | 1,063,352 | | | 90,642 | | | 94,131 | |
Other investments | | Level 3 | | 21,064 | | | 21,064 | | | 10,518 | | | 10,518 | |
Loans, held for sale | | Level 2 | | 60,775 | | | 60,775 | | | 113,349 | | | 113,349 | |
Loans and leases, net(1) | | Level 3 | | 11,340,711 | | | 11,115,598 | | | 7,791,482 | | | 7,723,867 | |
Stock in FHLB of Pittsburgh | | Level 2 | | 10,118 | | | 10,118 | | | 6,073 | | | 6,073 | |
Accrued interest receivable | | Level 2 | | 55,718 | | | 55,718 | | | 41,596 | | | 41,596 | |
Other assets | | Level 2 | | 102,196 | | | 102,196 | | | 5,153 | | | 5,153 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | Level 2 | | 17,269,607 | | | 17,237,428 | | | 13,240,062 | | | 13,236,816 | |
Borrowed funds | | Level 2 | | 369,783 | | | 345,942 | | | 239,477 | | | 225,119 | |
Standby letters of credit | | Level 3 | | 504 | | | 504 | | | 674 | | | 674 | |
Accrued interest payable | | Level 2 | | 3,091 | | | 3,091 | | | 736 | | | 736 | |
Other liabilities | | Levels 2, 3 | | 118,139 | | | 118,139 | | | 23,291 | | | 23,291 | |
(1) Includes reverse mortgage loans.
At June 30, 2022 and December 31, 2021 the Company had no commitments to extend credit measured at fair value.
15. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both economic conditions and its business operations. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. The Corporation does not use derivative financial instruments for trading purposes.
Fair Values of Derivative Instruments
The table below presents the fair value of derivative financial instruments as well as their location on the unaudited Consolidated Statements of Financial Condition as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Values of Derivative Instruments |
(Dollars in thousands) | | | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate products | | | | $ | 1,623,446 | | | Other assets | | $ | 100,307 | |
Interest rate products | | | | 1,623,446 | | | Other liabilities | | (100,307) | |
Interest rate lock commitments with customers | | | | 93,581 | | | Other assets | | 1,585 | |
Interest rate lock commitments with customers | | | | 2,958 | | | Other liabilities | | (16) | |
Forward sale commitments | | | | 51,559 | | | Other assets | | 156 | |
Forward sale commitments | | | | 40,395 | | | Other liabilities | | (255) | |
FX forwards | | | | 1,015 | | | Other assets | | 61 | |
FX forwards | | | | 263 | | | Other liabilities | | (1) | |
Risk participation agreements sold | | | | 52,956 | | | Other liabilities | | (4) | |
Risk participation agreements purchased | | | | 66,635 | | | Other assets | | 87 | |
Financial derivatives related to sales of certain Visa Class B shares | | | | 113,177 | | | Other liabilities | | (17,556) | |
Total derivatives | | | | $ | 3,669,431 | | | | | $ | (15,943) | |
The table below presents the fair value of derivative financial instruments as well as their location on the Consolidated Statements of Financial Condition as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Values of Derivative Instruments |
(Dollars in thousands) | | | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate products | | | | $ | 54,834 | | | Other assets | | $ | 2,625 | |
Interest rate products | | | | 54,834 | | | Other liabilities | | (2,847) | |
Risk participation agreements | | | | 4,214 | | | Other liabilities | | (3) | |
Interest rate lock commitments with customers | | | | 102,264 | | | Other assets | | 1,991 | |
Interest rate lock commitments with customers | | | | 12,813 | | | Other liabilities | | (73) | |
Forward sale commitments | | | | 63,664 | | | Other assets | | 537 | |
Forward sale commitments | | | | 67,032 | | | Other liabilities | | (116) | |
Financial derivatives related to sales of certain Visa Class B shares | | | | 113,177 | | | Other liabilities | | (20,252) | |
Total derivatives | | | | $ | 472,832 | | | | | $ | (18,138) | |
Derivatives Designated as Hedging Instruments:
Cash Flow Hedges of Interest Rate Risk
In 2020, the Company terminated its 3 interest rate derivatives that were designated as cash flow hedges for a net gain of $1.3 million, recognized in accumulated other comprehensive income. The derivatives were used to hedge the variable cash flows associated with a variable rate loan pool. Hedge accounting was discontinued, and the net gain in accumulated comprehensive income is reclassified into earnings when the transaction affects earnings. As the underlying hedged transaction continues to be probable, the $1.3 million net gain will be recognized into earnings on a straight-line basis over each derivative's original contract term. During the three and six months ended June 30, 2022, less than $0.1 million and $0.1 million was reclassified into interest income. During the next twelve months, the Company estimates that an additional $0.2 million will be reclassified as an increase to interest income.
Derivatives Not Designated as Hedging Instruments:
Swap Guarantees
The Company entered into agreements with 5 unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) directly with customers referred to them by the Company. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction, only in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives.
At June 30, 2022 and December 31, 2021, there were 257 and 261 variable-rate to fixed-rate swap transactions between the third-party financial institutions and the Company's customers, respectively. The initial notional aggregate amount was approximately $1.1 billion and $1.1 billion at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the swap transactions remaining maturities ranged from under 1 year to 13 years. At June 30, 2022, 27 of these customer swaps were in a paying position to third parties for $1.9 million, with our swap guarantees having a fair value of $12.0 million. At December 31, 2021, 193 of these customer swaps were in a paying position to third parties for $35.8 million, with the Company's swap guarantees having a fair value of $13.1 million. However, for both periods, none of the Company's customers were in default of the swap agreements.
Customer Derivatives – Interest Rate Swaps
The Company enters into interest rate swaps with commercial loan customers wishing to manage interest rate risk. The Company then enters into corresponding swap agreements with swap dealer counterparties to economically hedge the exposure arising from these contracts. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of June 30, 2022, there were no fair value adjustments related to credit quality.
Derivative Financial Instruments from Mortgage Banking Activities
Derivative financial instruments related to mortgage banking activities are recorded at fair value and are not designated as accounting hedges. This includes commitments to originate certain fixed-rate residential mortgage loans to customers, also referred to as interest rate lock commitments. The Company may also enter into forward sale commitments to sell loans to investors at a fixed price at a future date and trade asset-backed securities to mitigate interest rate risk.
The table below presents the effect of the derivative financial instruments on the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2022 and June 30, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | |
| | Amount of (Loss) or Gain Recognized in Income | | Amount of (Loss) Recognized in Income | | Location of Gain or (Loss) Recognized in Income |
(Dollars in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, | | |
Derivatives not designated as hedging instruments | | 2022 | | 2021 | | 2022 | | 2021 | | |
Interest rate lock commitments with customers | | $ | 403 | | | $ | (823) | | | $ | (825) | | | $ | (4,087) | | | Mortgage banking activities, net |
Forward sale commitments | | 887 | | | (2,742) | | | 4,023 | | | $ | 3,382 | | | Mortgage banking activities, net |
Total | | $ | 1,290 | | | $ | (3,565) | | | $ | 3,198 | | | $ | (705) | | | |
Foreign Exchange Forward Contracts
The Company enters into foreign exchange forward contracts (FX forwards) with customers to exchange one currency for another on an agreed date in the future at an agreed exchange rate. The Corporation then enters into corresponding FX forwards with swap dealer counterparties to economically hedge its exposure on the exchange rate component of the customer agreements. The FX forwards with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate. As the FX forwards are structured to offset each other, changes to the underlying term structure of currency exchange rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of June 30, 2022, there were no fair value adjustments related to credit quality.
Risk Participation Agreements
The Company may enter into a risk participation agreement (RPA) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased.”
Credit-risk-related Contingent Features
The Company has agreements with certain derivative counterparties that contain a provision under which, if it defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $1.0 million in securities and $6.0 million in cash against its obligations under these agreements which meets or exceeds the minimum collateral posting requirements. If the Company had breached any of these provisions at June 30, 2022, it could have been required to settle its obligations under the agreements at the termination value.
16. SEGMENT INFORMATION
As defined in ASC 280, Segment Reporting (ASC 280), an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company evaluates performance based on pretax net income relative to resources used, and allocate resources based on these results. The accounting policies applicable to the Company's segments are those that apply to its preparation of the accompanying unaudited Consolidated Financial Statements. Based on these criteria, the Company has identified 3 segments: WSFS Bank, Cash Connect®, and Wealth Management.
The WSFS Bank segment provides financial products to commercial and retail customers. Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS Bank. These departments share the same regulators, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Accordingly, these departments are not considered discrete segments and are appropriately aggregated in the WSFS Bank segment.
The Company's Cash Connect® segment provides ATM vault cash, smart safe and other cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and retail safes nationwide. The balance sheet category Cash in non-owned ATMs includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect®.
The Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate, and institutional clients through multiple integrated businesses. WSFS Wealth® Investments provides financial advisory services along with annuities and brokerage products. Cypress, a registered investment adviser, is a fee-only wealth management firm managing a “balanced” investment style portfolio focused on preservation of capital and generating current income. West Capital, a registered investment adviser, is a fee-only wealth management firm operating under a multi-family office philosophy to provide customized solutions to institutions and high-net-worth individuals. WSFS Institutional Services® provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional, corporate clients and special purpose vehicles. BMT-DE and Christiana Trust DE, which merged on April 1, 2022, provide personal trust and fiduciary services to families and individuals across the U.S. under The Bryn Mawr Trust Company of Delaware name. Powdermill® is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Private Banking serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management businesses to provide comprehensive solutions to clients. BMTIA was a full-service insurance agency, through which the Bank offered insurance and related products and services to its customer base. This included casualty, property and allied insurance lines, as well as life insurance, annuities, medical insurance and accident and health insurance for groups and individuals. The BMTIA business was sold to Patriot Growth Insurance Services, LLC in June 2022.
The following tables show segment results for the three and six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
(Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Income | | | | | | | | | | | | | | | | |
External customer revenues: | | | | | | | | | | | | | | | | |
Interest income | | $ | 157,174 | | | $ | — | | | $ | 2,846 | | | $ | 160,020 | | | $ | 110,725 | | | $ | — | | | $ | 2,177 | | | $ | 112,902 | |
Noninterest income | | 27,423 | | | 12,014 | | | 32,592 | | | 72,029 | | | 22,282 | | | 11,213 | | | 15,523 | | | 49,018 | |
Total external customer revenues | | 184,597 | | | 12,014 | | | 35,438 | | | 232,049 | | | 133,007 | | | 11,213 | | | 17,700 | | | 161,920 | |
Inter-segment revenues: | | | | | | | | | | | | | | | | |
Interest income | | 2,098 | | | 406 | | | 8,868 | | | 11,372 | | | 842 | | | 328 | | | 3,031 | | | 4,201 | |
Noninterest income | | 6,707 | | | 424 | | | 161 | | | 7,292 | | | 3,790 | | | 316 | | | 515 | | | 4,621 | |
Total inter-segment revenues | | 8,805 | | | 830 | | | 9,029 | | | 18,664 | | | 4,632 | | | 644 | | | 3,546 | | | 8,822 | |
Total revenue | | 193,402 | | | 12,844 | | | 44,467 | | | 250,713 | | | 137,639 | | | 11,857 | | | 21,246 | | | 170,742 | |
External customer expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 6,149 | | | — | | | 256 | | | 6,405 | | | 5,983 | | | — | | | 170 | | | 6,153 | |
Noninterest expenses | | 108,631 | | | 8,188 | | | 17,230 | | | 134,049 | | | 80,480 | | | 7,288 | | | 8,264 | | | 96,032 | |
Provision for (recovery of) credit losses | | 7,975 | | | — | | | 293 | | | 8,268 | | | (66,385) | | | — | | | (1,178) | | | (67,563) | |
Total external customer expenses | | 122,755 | | | 8,188 | | | 17,779 | | | 148,722 | | | 20,078 | | | 7,288 | | | 7,256 | | | 34,622 | |
Inter-segment expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 9,274 | | | 1,207 | | | 891 | | | 11,372 | | | 3,359 | | | 207 | | | 635 | | | 4,201 | |
Noninterest expenses | | 585 | | | 1,106 | | | 5,601 | | | 7,292 | | | 831 | | | 1,104 | | | 2,686 | | | 4,621 | |
Total inter-segment expenses | | 9,859 | | | 2,313 | | | 6,492 | | | 18,664 | | | 4,190 | | | 1,311 | | | 3,321 | | | 8,822 | |
Total expenses | | 132,614 | | | 10,501 | | | 24,271 | | | 167,386 | | | 24,268 | | | 8,599 | | | 10,577 | | | 43,444 | |
Income before taxes | | $ | 60,788 | | | $ | 2,343 | | | $ | 20,196 | | | $ | 83,327 | | | $ | 113,371 | | | $ | 3,258 | | | $ | 10,669 | | | $ | 127,298 | |
Income tax provision | | | | | | | | 22,425 | | | | | | | | | 31,687 | |
Consolidated net income | | | | | | | | 60,902 | | | | | | | | | 95,611 | |
Net income (loss) attributable to noncontrolling interest | | | | | | | | 162 | | | | | | | | | (56) | |
Net income attributable to WSFS | | | | | | | | $ | 60,740 | | | | | | | | | $ | 95,667 | |
Supplemental Information | | | | | | | | | | | | | | | | |
Capital expenditures for the period ended | | $ | 2,789 | | | $ | — | | | $ | — | | | $ | 2,789 | | | $ | 1,735 | | | $ | — | | | $ | — | | | $ | 1,735 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
(Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Income | | | | | | | | | | | | | | | | |
External customer revenues: | | | | | | | | | | | | | | | | |
Interest income | | $ | 298,576 | | | $ | — | | | $ | 5,581 | | | $ | 304,157 | | | $ | 229,856 | | | $ | — | | | $ | 4,327 | | | $ | 234,183 | |
Noninterest income | | 46,248 | | | 22,084 | | | 64,271 | | | 132,603 | | | 45,630 | | | 20,915 | | | 30,295 | | | 96,840 | |
Total external customer revenues | | 344,824 | | | 22,084 | | | 69,852 | | | 436,760 | | | 275,486 | | | 20,915 | | | 34,622 | | | 331,023 | |
Inter-segment revenues: | | | | | | | | | | | | | | | | |
Interest income | | 3,150 | | | 732 | | | 14,207 | | | 18,089 | | | 1,686 | | | 597 | | | 5,726 | | | 8,009 | |
Noninterest income | | 13,197 | | | 789 | | | 347 | | | 14,333 | | | 7,485 | | | 602 | | | 916 | | | 9,003 | |
Total inter-segment revenues | | 16,347 | | | 1,521 | | | 14,554 | | | 32,422 | | | 9,171 | | | 1,199 | | | 6,642 | | | 17,012 | |
Total revenue | | 361,171 | | | 23,605 | | | 84,406 | | | 469,182 | | | 284,657 | | | 22,114 | | | 41,264 | | | 348,035 | |
External customer expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 11,552 | | | — | | | 432 | | | 11,984 | | | 12,887 | | | — | | | 362 | | | 13,249 | |
Noninterest expenses | | 257,132 | | | 15,737 | | | 35,637 | | | 308,506 | | | 161,024 | | | 14,586 | | | 16,041 | | | 191,651 | |
Provision for (recovery of) credit losses | | 27,184 | | | — | | | 55 | | | 27,239 | | | (85,978) | | | — | | | (1,745) | | | (87,723) | |
Total external customer expenses | | 295,868 | | | 15,737 | | | 36,124 | | | 347,729 | | | 87,933 | | | 14,586 | | | 14,658 | | | 117,177 | |
Inter-segment expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 14,939 | | | 1,482 | | | 1,668 | | | 18,089 | | | 6,323 | | | 387 | | | 1,299 | | | 8,009 | |
Noninterest expenses | | 1,136 | | | 2,251 | | | 10,946 | | | 14,333 | | | 1,518 | | | 2,191 | | | 5,294 | | | 9,003 | |
Total inter-segment expenses | | 16,075 | | | 3,733 | | | 12,614 | | | 32,422 | | | 7,841 | | | 2,578 | | | 6,593 | | | 17,012 | |
Total expenses | | 311,943 | | | 19,470 | | | 48,738 | | | 380,151 | | | 95,774 | | | 17,164 | | | 21,251 | | | 134,189 | |
Income before taxes | | $ | 49,228 | | | $ | 4,135 | | | $ | 35,668 | | | $ | 89,031 | | | $ | 188,883 | | | $ | 4,950 | | | $ | 20,013 | | | $ | 213,846 | |
Income tax provision | | | | | | | | 24,162 | | | | | | | | | 53,094 | |
Consolidated net income | | | | | | | | 64,869 | | | | | | | | | 160,752 | |
Net income attributable to noncontrolling interest | | | | | | | | 325 | | | | | | | | | 3 | |
Net income attributable to WSFS | | | | | | | | 64,544 | | | | | | | | | 160,749 | |
Supplemental Information | | | | | | | | | | | | | | | | |
Capital expenditures for the period ended | | $ | 4,436 | | | $ | — | | | $ | — | | | $ | 4,436 | | | $ | 3,005 | | | $ | — | | | $ | — | | | $ | 3,005 | |
The following table shows significant components of segment net assets as of June 30, 2022 and December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
(Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Financial Condition | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,018,601 | | | $ | 624,794 | | | $ | 33,214 | | | $ | 1,676,609 | | | $ | 1,039,046 | | | $ | 477,806 | | | $ | 16,087 | | | $ | 1,532,939 | |
Goodwill | | 753,065 | | | — | | | 130,051 | | | 883,116 | | | 452,629 | | | — | | | 20,199 | | | 472,828 | |
Other segment assets | | 17,641,781 | | | 9,838 | | | 338,872 | | | 17,990,491 | | | 13,481,370 | | | 6,785 | | | 283,405 | | | 13,771,560 | |
Total segment assets | | $ | 19,413,447 | | | $ | 634,632 | | | $ | 502,137 | | | $ | 20,550,216 | | | $ | 14,973,045 | | | $ | 484,591 | | | $ | 319,691 | | | $ | 15,777,327 | |
| | | | | | | | | | | | | | | | |
17. COMMITMENTS AND CONTINGENCIES
Secondary Market Loan Sales
The Company typically sells newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to GSEs such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on the unaudited Consolidated Statements of Financial Condition at fair value with changes in the value reflected in the unaudited Consolidated Statements of Income. Gains and losses are recognized at the time of sale. The Company periodically retains the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in Intangible assets in the unaudited Consolidated Statements of Financial Condition. Otherwise, the Company sells loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that the Company intends to sell in the secondary market are accounted for as derivatives under ASC 815, Derivatives and Hedging (ASC 815).
The Company does not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were 2 repurchases for $0.8 million during the six months ended June 30, 2022 and no repurchases during the same period in 2021.
Unfunded Lending Commitments
At June 30, 2022 and December 31, 2021, the allowance for credit losses of unfunded lending commitments was $11.5 million and $7.4 million, respectively. A provision release of $0.2 million and $0.1 million was recognized during the three and six months ended June 30, 2022 compared to a provision release of $0.8 million and $0.2 million during the three and six months ended June 30, 2021.
18. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive income includes unrealized gains and losses on available-for-sale investments, unrealized gains and losses on cash flow hedges, as well as unrecognized prior service costs, transition costs, and actuarial gains and losses on defined benefit pension plans. Changes to accumulated other comprehensive (loss) income are presented, net of tax, as a component of stockholders’ equity. Amounts that are reclassified out of accumulated other comprehensive (loss) income are recorded on the unaudited Consolidated Statement of Income either as a gain or loss. Changes to accumulated other comprehensive (loss) income by component are shown, net of taxes, in the following tables for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Net change in investment securities available-for-sale | | Net change in investment securities held-to-maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges (1) | | Net change in equity method investments | | Total |
Balance, March 31, 2022 | | $ | (309,791) | | | $ | 147 | | | $ | (4,718) | | | $ | 229 | | | $ | 353 | | | $ | (313,780) | |
Other comprehensive (loss) income(2) | | (85,422) | | | (119,824) | | | (1) | | | — | | | 188 | | | (205,059) | |
| | | | | | | | | | | | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | — | | | 28 | | | (27) | | | (40) | | | — | | | (39) | |
Net current-period other comprehensive (loss) income | | (85,422) | | | (119,796) | | | (28) | | | (40) | | | 188 | | | (205,098) | |
Balance, June 30, 2022 | | $ | (395,213) | | | $ | (119,649) | | | $ | (4,746) | | | $ | 189 | | | $ | 541 | | | $ | (518,878) | |
| | | | | | | | | | | | |
Balance, March 31, 2021 | | $ | (9,957) | | | $ | 260 | | | $ | (4,804) | | | $ | 535 | | | $ | 264 | | | $ | (13,702) | |
Other comprehensive income (loss) | | 24,104 | | | — | | | (9) | | | — | | | — | | | 24,095 | |
Less: Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | (28) | | | (15) | | | (112) | | | — | | | (155) | |
Net current-period other comprehensive income (loss) | | 24,104 | | | (28) | | | (24) | | | (112) | | | — | | | 23,940 | |
Balance, June 30, 2021 | | $ | 14,147 | | | $ | 232 | | | $ | (4,828) | | | $ | 423 | | | $ | 264 | | | $ | 10,238 | |
(1)Cash flow hedges were terminated as of April 1, 2020 |
(2)Includes $119.8 million, net of tax, of unrealized losses on transferred investment securities from available-for-sale to held-to-maturity. |
| | | | | | | | | | | | |
(Dollars in thousands) | | Net change in investment securities available-for-sale | | Net change in investment securities held-to-maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges (1) | | Net change in equity method investments | | Total |
Balance, December 31, 2021 | | $ | (33,873) | | | $ | 175 | | | $ | (4,691) | | | $ | 268 | | | $ | 353 | | | $ | (37,768) | |
Other comprehensive (loss) income(2) | | (361,340) | | | (119,768) | | | — | | | 1 | | | 188 | | | (480,919) | |
| | | | | | | | | | | | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | — | | | (56) | | | (55) | | | (80) | | | — | | | (191) | |
Net current-period other comprehensive (loss) income | | (361,340) | | | (119,824) | | | (55) | | | (79) | | | 188 | | | (481,110) | |
Balance, June 30, 2022 | | $ | (395,213) | | | $ | (119,649) | | | $ | (4,746) | | | $ | 189 | | | $ | 541 | | | $ | (518,878) | |
| | | | | | | | | | | | |
Balance, December 31, 2020 | | $ | 59,882 | | | $ | 276 | | | $ | (4,788) | | | $ | 646 | | | $ | (9) | | | $ | 56,007 | |
Other comprehensive income (loss) | | (45,485) | | | — | | | (9) | | | — | | | 273 | | | (45,221) | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | (250) | | | (44) | | | (31) | | | (223) | | | — | | | (548) | |
Net current-period other comprehensive (loss) income | | (45,735) | | | (44) | | | (40) | | | (223) | | | 273 | | | (45,769) | |
Balance, June 30, 2021 | | $ | 14,147 | | | $ | 232 | | | $ | (4,828) | | | $ | 423 | | | $ | 264 | | | $ | 10,238 | |
(1)Cash flow hedges were terminated as of April 1, 2020 |
(2)Includes $119.8 million, net of tax, of unrealized losses on transferred investment securities from available-for-sale to held-to-maturity. |
The unaudited Consolidated Statements of Income were impacted by components of other comprehensive income as shown in the tables below:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Affected line item in unaudited Consolidated Statements of Income |
(Dollars in thousands) | | 2022 | | 2021 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | 37 | | | (37) | | | Interest and dividends on investment securities |
Income taxes | | (9) | | | 9 | | | Income tax provision |
Net of tax | | 28 | | | (28) | | | |
Amortization of defined benefit pension plan-related items: | | | | | | |
Prior service credits | | (19) | | | (22) | | | |
| | | | | | |
Actuarial (gains) losses | | (17) | | | 2 | | | |
Total before tax | | (36) | | | (20) | | | Salaries, benefits and other compensation |
Income taxes | | 9 | | | 5 | | | Income tax provision |
Net of tax | | (27) | | | (15) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net unrealized gains on terminated cash flow hedges: | | | | | | |
Amortization of net unrealized gains to income during the period | | (53) | | | (147) | | | Interest and fees on loans and leases |
Income taxes | | 13 | | | 35 | | | Income tax provision |
Net of tax | | (40) | | | (112) | | | |
Total reclassifications | | $ | (39) | | | $ | (155) | | | |
| | | | | | |
| | Six Months Ended June 30, | | Affected line item in unaudited Consolidated Statements of Operations |
| | 2022 | | 2021 | | |
Securities available-for-sale: | | | | | | |
Realized gains on securities transactions | | $ | — | | | $ | (329) | | | Securities gains, net |
Income taxes | | — | | | 79 | | | Income tax provision |
Net of tax | | — | | | (250) | | | |
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | (74) | | | (58) | | | Interest and dividends on investment securities |
Income taxes | | 18 | | | 14 | | | Income tax provision |
Net of tax | | (56) | | | (44) | | | |
Amortization of defined benefit pension plan-related items: | | | | | | |
Prior service credits | | (38) | | | (44) | | | |
| | | | | | |
Actuarial losses (gains) | | (34) | | | 3 | | | |
Total before tax | | (72) | | | (41) | | | Salaries, benefits and other compensation |
Income taxes | | 17 | | | 10 | | | Income tax provision |
Net of tax | | (55) | | | (31) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net unrealized gains on terminated cash flow hedges: | | | | | | |
Amortization of net unrealized gains to income during the period | | (105) | | | (293) | | | Interest and fees on loans and leases |
Income taxes | | 25 | | | 70 | | | Income tax provision |
Net of tax | | (80) | | | (223) | | | |
Total reclassifications | | $ | (191) | | | $ | (548) | | | |
19. LEGAL AND OTHER PROCEEDINGS
In accordance with the current accounting standards for loss contingencies, the Company establishes reserves for litigation-related matters that arise in the ordinary course of its business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, the Company's defense of litigation claims may result in legal fees, which it expenses as incurred.
There were no material changes or additions to other significant pending legal or other proceedings involving the Company other than those arising out of routine operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WSFS Financial Corporation (WSFS, and together with its subsidiaries, the Company) is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies in the United States (U.S.) continuously operating under the same name. With $20.6 billion in assets and $60.3 billion in assets under management (AUM) and assets under administration (AUA) at June 30, 2022, WSFS Bank is the oldest and largest locally-managed bank and trust company headquartered in the Greater Philadelphia and Delaware region. As a federal savings bank that was formerly chartered as a state mutual savings bank, WSFS Bank enjoys a broader scope of permissible activities than most other financial institutions. A fixture in the community, we have been in operation for more than 190 years. In addition to our focus on stellar customer experience, we have continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution. Our mission is simple: “We Stand for Service.” Our strategy of “Engaged Associates, living our culture, enriching the communities we serve” focuses on exceeding customer expectations, delivering stellar experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.
As of June 30, 2022, we had seven consolidated subsidiaries: WSFS Bank, WSFS Wealth Management, LLC (Powdermill®), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress), WSFS SPE Services, LLC, The Bryn Mawr Trust Company of Delaware (BMT-DE), and 601 Perkasie, LLC. The Company also has three unconsolidated subsidiaries: WSFS Capital Trust III, Royal Bancshares Capital Trust I, and Royal Bancshares Capital Trust II. WSFS Bank has two wholly owned subsidiaries: Beneficial Equipment Finance Corporation (BEFC) and 1832 Holdings, Inc., and one majority-owned subsidiary, NewLane Finance Company (NewLane Finance®).
On January 1, 2022, WSFS and the Bank acquired certain subsidiaries in the merger of Bryn Mawr Bank Corporation (BMBC) with and into WSFS, and the merger of The Bryn Mawr Trust Company with and into the Bank (collectively, the BMBC Merger), pursuant to the agreement and plan of merger, by and between WSFS and BMBC, dated as of March 9, 2021 (the BMBC Merger Agreement) that are not named herein as they are not integral or significant to our business.
On April 1, 2022, WSFS completed the merger of Christiana Trust Company of Delaware® and BMT-DE. The combined organization will retain and operate under The Bryn Mawr Trust Company of Delaware name. Additionally on April 1, 2022, Bryn Mawr Equipment Finance, Inc. merged with and into BEFC. On April 29, 2022, KCMI Capital, Inc. (KCMI), a specialized commercial lending unit acquired in the BMBC merger and not core to our overall lending strategy, was sold at par value for $55.5 million. Finally, on June 30, 2022, the business of BMT Insurance Advisors (BMTIA), was sold to Patriot Growth Services, LLC.
Our banking business had a total loan and lease portfolio of $11.5 billion as of June 30, 2022, which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a $9.2 billion commercial loan and lease portfolio by recruiting seasoned commercial lenders in our markets, offering the high level of service and flexibility typically associated with a community bank and through acquisitions. We also offer a broad variety of consumer loan products and retail securities brokerage through our retail branches, in addition to mortgage and title services through our branches and WSFS Mortgage®, our mortgage banking company specializing in a variety of residential mortgage and refinancing solutions. Our leasing business, conducted by NewLane Finance®, originates small business leases and provides commercial financing to businesses nationwide, targeting various equipment categories including technology, software, office, medical, veterinary and other areas. In addition, NewLane Finance® offers captive insurance through its subsidiary, Prime Protect.
Our Cash Connect® business is a premier provider of ATM vault cash, smart safe (safes that automatically accept, validate, record and hold cash in a secure environment) and other cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and retail safes nationwide, and manages approximately $2.0 billion in total cash and services approximately 27,400 non-bank ATMs and 6,900 smart safes nationwide. Cash Connect® provides related services such as online reporting and ATM cash management, predictive cash ordering and reconcilement services, armored carrier management, loss protection, ATM processing equipment sales and deposit safe cash logistics. Cash Connect® also supports over 600 branded ATMs for WSFS Bank Customers, which is one of the largest branded ATM networks in our market.
Our Wealth Management business provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate and institutional clients through multiple integrated businesses. Combined, these businesses had $60.3 billion of AUM and AUA at June 30, 2022. WSFS Wealth® Investments provides financial advisory services along with annuities and brokerage products. Cypress, a registered investment adviser, is a fee-only wealth management firm managing a “balanced” investment style portfolio focused on preservation of capital and generating current income. West Capital, a registered investment adviser, is a fee-only wealth management firm operating under a multi-family office philosophy to provide customized solutions to institutions and high-net-worth individuals. WSFS Institutional Services® provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional, corporate clients and special purpose vehicles. BMT-DE provides personal trust and fiduciary services to families and individuals across the U.S. Powdermill® is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Private Banking serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management businesses to provide comprehensive solutions to clients. As of June 30, 2022, we service our customers primarily from 121 offices located in Pennsylvania (62), Delaware (39), New Jersey, (18), Virginia (1) and Nevada (1), our ATM network, our website at www.wsfsbank.com and our mobile app.
Highlights and Other Notables Items for Three and Six Months Ended June 30, 2022
•Three Months Ended June 30, 2022
◦$1.1 billion of available-for-sale ("AFS") mortgage-backed securities ("MBS"), or 19% of the AFS portfolio, were designated as held-to-maturity ("HTM") to limit the capital impact from the rising interest rate environment.
◦WSFS repurchased 1,185,602 shares of common stock under the Company's share repurchase program at an average price of $40.74 per share, for an aggregate purchase price of $48.3 million.
◦The Board of Directors approved a 15% increase in our quarterly cash dividend to $0.15 per share and a new share repurchase authorization of 10% outstanding shares. At June 30, 2022, 14% of outstanding shares were available to be repurchased.
◦KCMI loan portfolio was sold at par value for $55.5 million.
◦The business of BMTIA was sold to Patriot Growth Insurance Services, LLC.
◦WSFS recognized a $6.0 million unrealized gain on our equity investment with CRED.ai, a Philadelphia-based fintech partner that provides a mobile-based everyday card spending experience.
◦The allowance for credit losses (ACL) on loans and leases increased $5.6 million, due to loan growth, partially offset by releases related to acquired portfolio run-off and the KCMI sale.
◦Executive management, in collaboration with the Board of Directors, finalized and embarked our next three-year Strategic Plan for the period 2022 through 2024.
•Six Months Ended June 30, 2022
◦We successfully closed the BMBC Merger on January 1, 2022. The total value of consideration paid of $908.0 million and $497.7 million in net assets acquired resulted in $410.3 million of goodwill recognized, as adjusted.
◦The BMBC Merger initially added $3.5 billion of net loans and leases, $4.1 billion of deposits, and $23.6 billion of AUM and AUA.
◦We recorded $40.4 million of corporate development expenses and $21.4 million of restructuring expenses during the six months ended June 30, 2022, primarily related to the BMBC Merger.
◦During the six months ended June 30, 2022, the ACL increased $47.5 million, primarily due to an initial ACL of $49.6 million recorded in connection with the BMBC Merger. The initial $49.6 million ACL recorded includes $23.5 million related to non-purchase credit deteriorated (PCD) loans, or the initial provision for credit loss recorded, and $26.1 million related to PCD loans, which did not have an initial income statement impact, but adjusted the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up).
◦During the six months ended June 30, 2022, WSFS repurchased 2,124,587 shares of common stock under the Company's share repurchase program at an average price of $45.12 per share, for an aggregate purchase price of $95.9 million.
FINANCIAL CONDITION
Total assets increased $4.8 billion to $20.6 billion at June 30, 2022 compared to December 31, 2021. This increase is primarily comprised of the following:
•Net loans and leases, excluding loans held for sale, increased $3.5 billion primarily driven by the $3.5 billion of loans and leases acquired in the BMBC Merger partially offset by the initial $49.6 million ACL recorded in connection with the BMBC Merger.
•Investment securities, held-to-maturity increased $973.5 million primarily due to the designation of $1.1 billion (book value) of AFS MBS to HTM to limit the capital impact from the rising interest rate environment.
•Goodwill and intangible assets increased $410.3 million and $62.3 million, respectively, primarily due to the BMBC Merger. See Notes 3 and 10 to the unaudited Consolidated Financial Statements for additional information.
•Other assets increased $268.1 million primarily due to $153.6 million of BMT acquired assets and a $151.9 million increase on our tax asset related to unrealized losses on AFS securities.
•Total cash and cash equivalents increased $143.7 million, primarily due to $573.8 million acquired in the BMBC Merger, offset by decreased deposits and increased lending activity.
•Investment securities, available-for-sale decreased $709.2 million during the six months ended June 30, 2022, primarily due to the designation of AFS MBS to HTM as mentioned above, repayments of $784.9 million and decreased market values on available-for-sale securities of $475.4 million. These decreases were partially offset by $1.2 billion in purchases and $500.4 million acquired in the BMBC merger.
•Loans held for sale decreased $52.6 million during the six months ended June 30, 2022 driven by a combination of lower origination volume and higher loans sales in our mortgage banking business during the six months ended June 30, 2022.
Total liabilities increased $4.4 billion to $18.2 billion at June 30, 2022 compared to December 31, 2021. This increase is primarily comprised of the following:
•Total deposits increased $4.0 billion, primarily driven by $4.1 billion of deposits assumed in the BMBC Merger, offset by a $128.7 million decline in short-term transaction related trust deposits.
•Other liabilities increased $234.8 million primarily due to a $148.6 million increase in collateral held on derivatives driven by rising interest rates and $123.6 million of BMT acquired liabilities, partially offset by $34.5 million lower accrued expenses reflecting the timing of settlement for debt security trades.
•Senior and subordinated debt increased $100.4 million due to the addition of subordinated notes assumed in the BMBC Merger.
For further information, see "Notes to the Consolidated Financial Statements (Unaudited)."
Loans and Leases
The following table shows the remaining contractual maturity and rate sensitivity of the loan portfolio by loan category as of June 30, 2022. Loans may be pre-paid, so the actual maturity may differ from the contractual maturity. Prepayments tend to be highly dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are reported in the "Less than One Year" category.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than One Year | | One to Five Years | | Five to Fifteen Years | | Over Fifteen Years | | Total |
Commercial and industrial(1) | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 51,212 | | | $ | 651,843 | | | $ | 210,272 | | | $ | 44,906 | | | $ | 958,233 | |
Adjustable | | 250,278 | | | 1,015,243 | | | 346,601 | | | 24,582 | | | 1,636,704 | |
Total | | $ | 301,490 | | | $ | 1,667,086 | | | $ | 556,873 | | | $ | 69,488 | | | $ | 2,594,937 | |
Owner-occupied commercial | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 35,049 | | | $ | 453,857 | | | $ | 436,921 | | | $ | 169,024 | | | $ | 1,094,851 | |
Adjustable | | 40,521 | | | 243,579 | | | 383,851 | | | 60,427 | | | 728,378 | |
Total | | $ | 75,570 | | | $ | 697,436 | | | $ | 820,772 | | | $ | 229,451 | | | $ | 1,823,229 | |
Commercial mortgages | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 102,336 | | | $ | 781,839 | | | $ | 419,672 | | | $ | 154,430 | | | $ | 1,458,277 | |
Adjustable | | 83,610 | | | 666,242 | | | 1,029,568 | | | 83,957 | | | 1,863,377 | |
Total | | $ | 185,946 | | | $ | 1,448,081 | | | $ | 1,449,240 | | | $ | 238,387 | | | $ | 3,321,654 | |
Construction | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 1,172 | | | $ | 34,791 | | | $ | 31,984 | | | $ | 6,224 | | | $ | 74,171 | |
Adjustable | | 256,489 | | | 403,232 | | | 195,622 | | | 4,810 | | | 860,153 | |
Total | | $ | 257,661 | | | $ | 438,023 | | | $ | 227,606 | | | $ | 11,034 | | | $ | 934,324 | |
Commercial small business leases | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 3,661 | | | $ | 473,011 | | | $ | 36,131 | | | $ | — | | | $ | 512,803 | |
Adjustable | | — | | | — | | | — | | | — | | | — | |
Total | | $ | 3,661 | | | $ | 473,011 | | | $ | 36,131 | | | $ | — | | | $ | 512,803 | |
Residential(2) | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 9,389 | | | $ | 24,999 | | | $ | 127,488 | | | $ | 472,963 | | | $ | 634,839 | |
Adjustable(3) | | 2 | | | 481 | | | 28,552 | | | 106,701 | | | 135,736 | |
Total | | $ | 9,391 | | | $ | 25,480 | | | $ | 156,040 | | | $ | 579,664 | | | $ | 770,575 | |
Consumer | | | | | | | | | | |
Interest rate: | | | | | | | | | | |
Fixed | | $ | 1,095 | | | $ | 287,615 | | | $ | 361,523 | | | $ | 329,008 | | | $ | 979,241 | |
Adjustable | | 7,198 | | | 74,986 | | | 24,243 | | | 436,928 | | | 543,355 | |
Total | | $ | 8,293 | | | $ | 362,601 | | | $ | 385,766 | | | $ | 765,936 | | | $ | 1,522,596 | |
Total loans and leases | | $ | 842,012 | | | $ | 5,111,718 | | | $ | 3,632,428 | | | $ | 1,893,960 | | | $ | 11,480,118 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) Includes $5.2 million of PPP loans.
(2) Excludes reverse mortgages at fair value of $2.6 million.
(3) Includes hybrid adjustable-rate mortgages.
Deposits
The following table shows the maturities of certificates of deposit of $250,000 or more as of June 30, 2022:
| | | | | |
(Dollars in thousands) | |
Maturity Period | June 30, 2022 |
Less than 3 months | $ | 54,446 | |
Over 3 months to 6 months | 32,458 | |
Over 6 months to 12 months | 24,252 | |
Over 12 months | 45,658 | |
Total | $ | 156,814 | |
The estimated amount of total uninsured deposits as of June 30, 2022 was $10.6 billion as compared to $7.5 billion at December 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Stockholders’ equity of WSFS increased $376.3 million between December 31, 2021 and June 30, 2022. This increase was primarily due to $908.0 million of WSFS common shares issued in connection with the BMBC Merger and $64.5 million of earnings, offset by a decrease of $481.1 million in accumulated other comprehensive income from market value decreases on investment securities resulting from the current rising interest rate environment, $95.9 million from the repurchase of shares of common stock under our stock repurchase plan, and the payment of dividends on our common stock of $17.0 million.
During the second quarter of 2022, our Board of Directors approved a 15% increase in the quarterly cash dividend to $0.15 per share of common stock. This dividend will be paid on August 19, 2022 to stockholders of record as of August 5, 2022.
Book value per share of common stock was $36.41 at June 30, 2022, a decrease of $4.32 from $40.73 at December 31, 2021. Tangible book value per share of common stock (a non-GAAP financial measure) was $20.37 at June 30, 2022, a decrease of $8.87 from $29.24 at December 31, 2021. These decreases are primarily due to increases in our outstanding shares, goodwill, and intangible assets as a result of the BMBC Merger. We believe tangible book value per common share helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP measure should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a substitute for, or superior to, GAAP results. For a reconciliation of tangible book value per common share to book value per share in accordance with GAAP, see "Reconciliation of Non-GAAP Measure to GAAP Measure."
The table below compares the Bank's and the Company’s consolidated capital position to the minimum regulatory requirements as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated Capital | | Minimum For Capital Adequacy Purposes | | To be Well-Capitalized Under Prompt Corrective Action Provisions |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | $ | 2,164,699 | | | 14.57 | % | | $ | 1,188,653 | | | 8.00 | % | | $ | 1,485,817 | | | 10.00 | % |
WSFS Financial Corporation | | 2,176,691 | | | 14.62 | | | 1,190,714 | | | 8.00 | | | 1,488,392 | | | 10.00 | |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 2,020,898 | | | 13.60 | | | 891,490 | | | 6.00 | | | 1,188,653 | | | 8.00 | |
WSFS Financial Corporation | | 1,857,013 | | | 12.48 | | | 893,035 | | | 6.00 | | | 1,190,714 | | | 8.00 | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 2,020,898 | | | 13.60 | | | 668,617 | | | 4.50 | | | 965,781 | | | 6.50 | |
WSFS Financial Corporation | | 1,857,013 | | | 12.48 | | | 669,777 | | | 4.50 | | | 967,455 | | | 6.50 | |
Tier 1 Leverage Capital | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 2,020,898 | | | 10.02 | | | 806,553 | | | 4.00 | | | 1,008,192 | | | 5.00 | |
WSFS Financial Corporation | | 1,857,013 | | | 9.20 | | | 807,336 | | | 4.00 | | | 1,009,170 | | | 5.00 | |
Under the prompt corrective action regime, regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends on its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions, which may include restrictions on capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.
Regulatory capital requirements for the Bank and the Company include a minimum common equity Tier 1 capital ratio of 4.50% of risk-weighted assets, a Tier 1 capital ratio of 6.00% of risk-weighted assets, a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets. In order to avoid limits on capital distributions and discretionary bonus payments, the Bank and the Company must maintain a capital conservation buffer of 2.5% of common equity Tier 1 capital over each of the risk-based capital requirements. As of June 30, 2022, the Bank and the Company were in compliance with the regulatory capital requirements and met or exceeded the amounts required to be considered “well-capitalized” as defined in the regulations.
Not included in the Bank’s capital, WSFS separately held $148.7 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.
As part of our adoption of the Current Expected Credit Losses (CECL) methodology in 2020, we elected to phase in the day-one adverse effects on regulatory capital that may result from the adoption of CECL over a three-year period, as permitted under a final rule of the federal banking agencies.
Liquidity
We manage our liquidity and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.
Funding sources to support growth and meet our liquidity needs include cash from operations, retail deposit programs, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to meet our funding needs as well as maintain required and prudent levels of liquidity over the next twelve months and beyond.
As of June 30, 2022, the Corporation has $1.7 billion in cash, cash equivalents, and restricted cash. Additionally, the maximum borrowing capacity with the FHLB was $4.9 billion with an unused borrowing availability of $4.9 billion. Borrowing availability at the Federal Reserve Discount Window was $229.6 million, and borrowing availability through the overnight fed funds lines totaled $1.4 billion.
Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At June 30, 2022, we had $251.4 million in total contractual payments for ongoing leases that have remaining lease terms of less than one year to 40 years, which includes renewal options that are exercised at our discretion. For additional information on our operating leases see Note 9 to the unaudited Consolidated Financial Statements. At June 30, 2022, we had no FHLB advances, and obligations for principal payments on long-term debt included $67.0 million for our trust preferred borrowings, due June 1, 2035, and $150.0 million for our senior debt, due December 15, 2030. In connection with the BMBC Merger, we assumed debt in the form of $30.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 and $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027. We also acquired Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the Trusts), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although WSFS owns an aggregate of $774.0 thousand of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Company’s Consolidated Financial Statements. Inclusive of the fair value marks, WSFS assumed junior subordinated debentures owed to the Trusts with a carrying value of $11.7 million each, totaling $23.3 million. The Company records its investments in the Trusts’ common securities of $387.0 thousand each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
We are also contractually obligated to make interest payments on our long-term debt through their respective maturities. For additional information regarding long-term debt, see Note 12 to the unaudited Consolidated Financial Statements. At June 30, 2022, the Company had total commitments to extend credit of $3.4 billion, which are generally one year commitments.
In 2022, we plan to invest approximately $14 million in our Delivery Transformation initiative to increase adoption and usage of digital channels aligned with our strategy. Our organization is committed to product and service innovation as a means to drive growth and to stay ahead of changing customer demands and emerging competition. We are focused on developing and maintaining a strong “culture of innovation” that solicits, captures, prioritizes and executes innovation initiatives, including feedback from our customers, as well as leveraging technology from product creation to process improvement.
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, OREO and restructured loans. Nonaccruing loans are those on which we no longer accrue interest. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.
The following table shows our nonperforming assets and past due loans at the dates indicated:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Nonaccruing loans: | | | | |
Commercial and industrial | | $ | 6,601 | | | $ | 8,211 | |
Owner-occupied commercial | | 353 | | | 811 | |
Commercial mortgages | | 4,263 | | | 2,070 | |
Construction | | 5,184 | | | 12 | |
Residential | | 2,573 | | | 3,125 | |
Consumer | | 2,037 | | | 2,380 | |
Total nonaccruing loans | | 21,011 | | | 16,609 | |
Other real estate owned | | 358 | | | 2,320 | |
Restructured loans(1)(6) | | 12,484 | | | 14,204 | |
Total nonperforming assets | | $ | 33,853 | | | $ | 33,133 | |
Past due loans: | | | | |
Commercial | | $ | 731 | | | $ | 1,357 | |
Residential | | 78 | | | — | |
Consumer (2) | | 11,085 | | | 8,634 | |
Total past due loans | | $ | 11,894 | | | $ | 9,991 | |
Ratio of allowance for credit losses to total loans and leases(3) | | 1.13 | % | | 1.19 | % |
| | | | |
Ratio of nonaccruing loans to total gross loans and leases(4) | | 0.18 | | | 0.21 | |
Ratio of nonperforming assets to total assets | | 0.16 | | | 0.21 | |
Ratio of allowance for credit losses to nonaccruing loans | | 676 | | | 569 | |
Ratio of allowance for credit losses to total nonperforming assets(5) | | 419 | | | 285 | |
(1)Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans.
(2)Includes U.S. government guaranteed student loans with little risk of credit loss.
(3)Represents amortized cost basis for loans, leases and held-to-maturity securities.
(4)Total loans exclude loans held for sale and reverse mortgages.
(5)Excludes acquired impaired loans.
(6)Balance excludes COVID-19 modifications.
Nonperforming assets increased $0.7 million between December 31, 2021 and June 30, 2022. This increase was primarily due to the transfer in of one C&I relationship totaling $5.4 million during the period, which was offset by several smaller payoffs and the continued collection of principal payments. The ratio of nonperforming assets to total assets decreased from 0.21% at December 31, 2021 to 0.16% at June 30, 2022.
The following table summarizes the changes in nonperforming assets during the periods indicated:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
(Dollars in thousands) | | 2022 | | 2021 |
Beginning balance | | $ | 33,133 | | | $ | 60,508 | |
Additions | | 14,191 | | | 14,790 | |
Collections | | (11,084) | | | (24,286) | |
Transfers to accrual | | — | | | (28) | |
Charge-offs | | (2,387) | | | (10,919) | |
Ending balance | | $ | 33,853 | | | $ | 40,065 | |
The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Problem loans are all criticized, classified and nonperforming loans and other real estate owned. Timely identification enables us to take appropriate action and accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system uses guidelines established by federal regulation.
INTEREST RATE SENSITIVITY
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while maximizing the yield/cost spread on our asset/liability structure. Interest rates are partly a function of decisions by the Federal Open Market Committee (FOMC) on the target range for the federal funds rate, and these decisions are sometimes difficult to anticipate. In response to the economic and financial effects of COVID-19, the FOMC reduced interest rates through 2020 and 2021 and instituted quantitative easing measures as well as domestic and global capital market support programs. The FOMC raised the federal funds target rate by 25 basis points in March 2022, 50 basis points in May 2022, 75 basis points in June 2022, and 75 basis points in July 2022, and has suggested it may continue raising interest rates further in 2022. In order to manage the risks associated with changes or possible changes in interest rates, we rely primarily on our asset/liability structure.
Our primary tool for achieving our asset/liability management strategies is to match maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At June 30, 2022, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $2.3 billion. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 132.99% at June 30, 2022 compared with 120.40% at December 31, 2021. Likewise, the one-year interest-sensitive gap as a percentage of total assets was 11.31% at June 30, 2022 compared with 7.28% at December 31, 2021.
The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at June 30, 2022 are shown in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than One Year | | One to Five Years | | Five to Fifteen Years | | Over Fifteen Years | | Total |
Interest-rate sensitive assets: | | | | | | | | | | |
Loans: | | | | | | | | | | |
Commercial loans and leases(2) | | $ | 4,146,624 | | | $ | 1,490,714 | | | $ | 320,333 | | | $ | 9,630 | | | $ | 5,967,301 | |
Commercial mortgage loans(2) | | 2,348,138 | | | 796,098 | | | 187,225 | | | 4,387 | | | 3,335,848 | |
Residential(1)(2) | | 166,834 | | | 289,460 | | | 262,509 | | | 77,906 | | | 796,709 | |
Consumer(2) | | 832,431 | | | 488,929 | | | 172,807 | | | 3,520 | | | 1,497,687 | |
Loans held for sale(2) | | 66,134 | | | 1,649 | | | 2,352 | | | 1,542 | | | 71,677 | |
Investment securities, available-for-sale | | 1,633,938 | | | 2,609,202 | | | 1,600,590 | | | 42,321 | | | 5,886,051 | |
Investment securities, held-to-maturity | | 167,828 | | | 525,212 | | | 346,889 | | | 24,257 | | | 1,064,186 | |
Other interest-earning assets | | 10,118 | | | — | | | — | | | — | | | 10,118 | |
Total interest-rate sensitive assets: | | $ | 9,372,045 | | | $ | 6,201,264 | | | $ | 2,892,705 | | | $ | 163,563 | | | $ | 18,629,577 | |
Interest-rate sensitive liabilities: | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | |
Interest-bearing demand | | $ | 1,697,975 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,697,975 | |
Savings | | 1,298,652 | | | — | | | — | | | — | | | 1,298,652 | |
Money market | | 3,024,104 | | | — | | | — | | | — | | | 3,024,104 | |
Customer time deposits | | 784,749 | | | 315,709 | | | 1,988 | | | — | | | 1,102,446 | |
| | | | | | | | | | |
Trust preferred borrowings | | 90,344 | | | — | | | — | | | — | | | 90,344 | |
Senior and subordinated debt | | 100,318 | | | 148,054 | | | — | | | — | | | 248,372 | |
Other borrowed funds | | 51,241 | | | — | | | — | | | — | | | 51,241 | |
Total interest-rate sensitive liabilities: | | $ | 7,047,383 | | | $ | 463,763 | | | $ | 1,988 | | | $ | — | | | $ | 7,513,134 | |
| | | | | | | | | | |
Excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap) | | $ | 2,324,662 | | | $ | 5,737,501 | | | $ | 2,890,717 | | | $ | 163,563 | | | $ | 11,116,443 | |
One-year interest-rate sensitive assets/interest-rate sensitive liabilities | | 132.99 | % | | | | | | | | |
One-year interest-rate sensitive gap as a percent of total assets | | 11.31 | % | | | | | | | | |
(1)Includes reverse mortgage loans
(2)Loan balances exclude nonaccruing loans, deferred fees and costs
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure evaluates the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.
The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
% Change in Interest Rate (Basis Points) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) |
+300 | | 25.4% | | 28.33% | | 25.1% | | 24.27% |
+200 | | 17.0% | | 26.88% | | 16.6% | | 23.07% |
+100 | | 8.5% | | 25.28% | | 8.2% | | 21.76% |
+50 | | 4.3% | | 23.75% | | 4.1% | | 20.33% |
+25 | | 2.1% | | 23.42% | | 2.0% | | 20.05% |
— | | —% | | 23.08% | | —% | | 19.73% |
-25 | | (2.1)% | | 22.72% | | (1.4)% | | 19.28% |
-50 | | (4.2)% | | 22.34% | | (2.2)% | | 18.72% |
-100 | | (8.6)% | | 21.45% | | (3.8)% | | 17.36% |
'-200(3) | | NMF | | NMF | | NMF | | NMF |
-300(3) | | NMF | | NMF | | NMF | | NMF |
(1)The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2)The economic value of equity ratio in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3)Sensitivity indicated by a decrease of 200 and 300 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates in the periods presented.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.
RESULTS OF OPERATIONS
Three months ended June 30, 2022: Net income for the three months ended June 30, 2022 was $60.7 million, compared to $95.7 million for the three months ended June 30, 2021.
•Net interest income increased $46.9 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to an increase from the balance sheet size and mix from the BMBC Merger, offset by the impact of PPP loans and lower purchase accounting accretion. See “Net Interest Income” for further information.
•Our provision for credit losses for the three months ended June 30, 2022 increased $75.8 million compared to the three months ended June 30, 2021, primarily due to the release of ACL reserves that occurred in 2021 as a result of positive economic forecasts following the impact of the COVID-19 pandemic. See “Allowance for Credit Losses” for further information.
•Noninterest income for the three months ended June 30, 2022 increased $23.0 million compared to the three months ended June 30, 2021, primarily due to increased Wealth Management revenue that is primarily attributable to the BMBC Merger, higher other banking fees, capital markets income, and Cash Connect®, partially offset by a decline in our mortgage banking business. See “Noninterest Income” for further information.
•Noninterest expense increased $38.0 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to higher costs after the BMBC Merger. These increases include salaries and benefits, net corporate development and restructuring costs, equipment, occupancy, and amortization expenses, and variable operating costs. See “Noninterest Expense” for further information.
•Income tax provision for the three months ended June 30, 2022 decreased $9.3 million compared to the three months ended June 30, 2021, primarily due to the $44.0 million decrease in pre-tax income.
Six months ended June 30, 2022: Net income for the six months ended June 30, 2022 was $64.5 million, compared to $160.7 million for the six months ended June 30, 2021.
•Net interest income increased $71.2 million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the reasons described above. See “Net Interest Income” for further information.
•Our provision for credit losses for the six months ended June 30, 2022 increased $115.0 million compared to the six months ended June 30, 2021, due to the reasons described above and the initial provision for credit losses of $23.5 million recorded in connection with the BMBC Merger. See “Allowance for Credit Losses” for further information.
•Noninterest income for the six months ended June 30, 2022 increased $35.8 million compared to the six months ended June 30, 2021, primarily due to an increase in Wealth Management revenue and capital markets income. Partially offsetting these increases was a decline in mortgage banking fees. See “Noninterest Income” for further information.
•Noninterest expense increased $116.9 million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to the reasons described above, including increases in net corporate development and restructuring costs, salaries and benefits, other operating expense, equipment expense, and occupancy expense, and variable operating costs. See “Noninterest Expense” for further information.
•Income tax provision for the six months ended June 30, 2022 decreased $28.9 million compared to the six months ended June 30, 2021, primarily due to the $124.8 million decrease in pre-tax income.
Net Interest Income
The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, |
| | 2022 | | 2021 |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans:(2) | | | | | | | | | | | | |
Commercial loans and leases | | $ | 4,831,874 | | | $ | 56,950 | | | 4.74 | % | | $ | 3,900,612 | | | $ | 46,039 | | | 4.74 | % |
Commercial real estate loans | | 4,238,090 | | | 43,448 | | | 4.11 | | | 2,791,438 | | | 28,277 | | | 4.06 | |
Residential loans | | 787,909 | | | 8,774 | | | 4.45 | | | 647,442 | | | 11,271 | | | 6.96 | |
Consumer loans | | 1,463,391 | | | 19,232 | | | 5.27 | | | 1,123,440 | | | 11,950 | | | 4.27 | |
Loans held for sale | | 66,502 | | | 938 | | | 5.66 | | | 131,460 | | | 1,108 | | | 3.38 | |
Total loans and leases | | 11,387,766 | | | 129,342 | | | 4.56 | | | 8,594,392 | | | 98,645 | | | 4.61 | |
Mortgage-backed securities(3) | | 5,282,333 | | | 27,377 | | | 2.07 | | | 2,978,331 | | | 12,506 | | | 1.68 | |
Investment securities(3) | | 295,845 | | | 1,340 | | | 2.13 | | | 318,415 | | | 1,383 | | | 1.97 | |
Other interest-earning assets | | 1,206,849 | | | 1,961 | | | 0.65 | | | 1,414,264 | | | 368 | | | 0.10 | |
Total interest-earning assets | | $ | 18,172,793 | | | $ | 160,020 | | | 3.54 | % | | $ | 13,305,402 | | | $ | 112,902 | | | 3.41 | % |
Allowance for credit losses | | (136,773) | | | | | | | (194,211) | | | | | |
Cash and due from banks | | 268,485 | | | | | | | 176,015 | | | | | |
Cash in non-owned ATMs | | 566,174 | | | | | | | 468,136 | | | | | |
Bank-owned life insurance | | 100,356 | | | | | | | 32,329 | | | | | |
Other noninterest-earning assets | | 1,766,854 | | | | | | | 998,948 | | | | | |
Total assets | | $ | 20,737,889 | | | | | | | $ | 14,786,619 | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
Interest-bearing demand | | $ | 3,348,511 | | | $ | 941 | | | 0.11 | % | | $ | 2,560,283 | | | $ | 531 | | | 0.08 | % |
Savings | | 2,281,051 | | | 159 | | | 0.03 | | | 1,922,342 | | | 149 | | | 0.03 | |
Money market | | 3,984,562 | | | 1,231 | | | 0.12 | | | 2,754,895 | | | 801 | | | 0.12 | |
Customer time deposits | | 1,142,139 | | | 1,273 | | | 0.45 | | | 1,078,296 | | | 1,842 | | | 0.69 | |
Total interest-bearing customer deposits | | 10,756,263 | | | 3,604 | | | 0.13 | | | 8,315,816 | | | 3,323 | | | 0.16 | |
Brokered deposits | | 35,469 | | | 162 | | | 1.83 | | | 63,407 | | | 455 | | | 2.88 | |
Total interest-bearing deposits | | 10,791,732 | | | 3,766 | | | 0.14 | | | 8,379,223 | | | 3,778 | | | 0.18 | |
| | | | | | | | | | | | |
Trust preferred borrowings | | 90,312 | | | 682 | | | 3.03 | | | 67,011 | | | 317 | | | 1.90 | |
Senior and subordinated debt | | 248,448 | | | 1,949 | | | 3.14 | | | 228,260 | | | 2,053 | | | 3.60 | |
Other borrowed funds(4) | | 31,045 | | | 8 | | | 0.10 | | | 21,661 | | | 5 | | | 0.09 | |
Total interest-bearing liabilities | | $ | 11,161,537 | | | $ | 6,405 | | | 0.23 | % | | $ | 8,696,155 | | | $ | 6,153 | | | 0.28 | % |
Noninterest-bearing demand deposits | | 6,631,062 | | | | | | | 3,963,476 | | | | | |
Other noninterest-bearing liabilities | | 543,587 | | | | | | | 329,341 | | | | | |
Stockholders’ equity | | 2,404,262 | | | | | | | 1,799,839 | | | | | |
Noncontrolling interest | | (2,559) | | | | | | | (2,192) | | | | | |
Total liabilities and stockholders’ equity | | $ | 20,737,889 | | | | | | | $ | 14,786,619 | | | | | |
Excess of interest-earning assets over interest-bearing liabilities | | $ | 7,011,256 | | | | | | | $ | 4,609,247 | | | | | |
Net interest income | | | | $ | 153,615 | | | | | | | $ | 106,749 | | | |
Interest rate spread | | | | | | 3.31 | % | | | | | | 3.13 | % |
Net interest margin | | | | | | 3.40 | % | | | | | | 3.23 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1)Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2)Average balances are net of unearned income and include nonperforming loans.
(3)Includes securities available-for-sale at fair value.
(4)Includes federal funds purchased.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2022 | | 2021 |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans:(2) | | | | | | | | | | | | |
Commercial loans and leases | | $ | 4,841,834 | | | $ | 109,416 | | | 4.57 | % | | $ | 4,018,667 | | | $ | 98,659 | | | 4.96 | % |
Commercial real estate loans | | 4,264,570 | | | 84,087 | | | 3.98 | | | 2,797,375 | | | 57,468 | | | 4.14 | |
Residential loans | | 815,650 | | | 18,431 | | | 4.52 | | | 690,776 | | | 24,135 | | | 6.99 | |
Consumer loans | | 1,410,971 | | | 34,516 | | | 4.93 | | | 1,141,414 | | | 24,786 | | | 4.38 | |
Loans held for sale | | 70,576 | | | 1,773 | | | 5.07 | | | 146,291 | | | 2,449 | | | 3.38 | |
Total loans and leases | | 11,403,601 | | | 248,223 | | | 4.39 | | | 8,794,523 | | | 207,497 | | | 4.76 | |
Mortgage-backed securities(3) | | 5,253,225 | | | 50,490 | | | 1.92 | | | 2,744,420 | | | 23,210 | | | 1.69 | |
Investment securities | | 313,239 | | | 2,661 | | | 1.97 | | | 327,363 | | | 2,832 | | | 1.97 | |
Other interest-earning assets | | 1,462,832 | | | 2,783 | | | 0.38 | | | 1,259,806 | | | 644 | | | 0.10 | |
Total interest-earning assets | | $ | 18,432,897 | | | $ | 304,157 | | | 3.33 | % | | $ | 13,126,112 | | | $ | 234,183 | | | 3.61 | % |
Allowance for credit losses | | (135,782) | | | | | | | (210,471) | | | | | |
Cash and due from banks | | 239,249 | | | | | | | 145,568 | | | | | |
Cash in non-owned ATMs | | 538,048 | | | | | | | 431,226 | | | | | |
Bank-owned life insurance | | 100,555 | | | | | | | 32,242 | | | | | |
Other noninterest-earning assets | | 1,703,144 | | | | | | | 998,202 | | | | | |
Total assets | | $ | 20,878,111 | | | | | | | $ | 14,522,879 | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
Interest-bearing demand | | $ | 3,391,704 | | | $ | 1,522 | | | 0.09 | % | | $ | 2,566,271 | | | $ | 1,149 | | | 0.09 | % |
Savings | | 2,271,591 | | | 321 | | | 0.03 | | | 1,876,815 | | | 299 | | | 0.03 | |
Money market | | 4,038,399 | | | 2,156 | | | 0.11 | | | 2,718,758 | | | 1,655 | | | 0.12 | |
Customer time deposits | | 1,157,496 | | | 2,596 | | | 0.45 | | | 1,097,636 | | | 4,219 | | | 0.78 | |
Total interest-bearing customer deposits | | 10,859,190 | | | 6,595 | | | 0.12 | | | 8,259,480 | | | 7,322 | | | 0.18 | |
Brokered deposits | | 49,345 | | | 299 | | | 1.22 | | | 99,979 | | | 952 | | | 1.92 | |
Total interest-bearing deposits | | 10,908,535 | | | 6,894 | | | 0.13 | | | 8,359,459 | | | 8,274 | | | 0.20 | |
Federal Home Loan Bank advances | | — | | | — | | | — | | | 366 | | | 5 | | | 2.75 | |
Trust preferred borrowings | | 90,288 | | | 1,195 | | | 2.67 | | | 67,011 | | | 641 | | | 1.93 | |
Senior debt | | 248,507 | | | 3,878 | | | 3.12 | | | 237,406 | | | 4,319 | | | 3.64 | |
Other borrowed funds(4) | | 34,700 | | | 17 | | | 0.10 | | | 20,664 | | | 10 | | | 0.10 | |
Total interest-bearing liabilities | | $ | 11,282,030 | | | $ | 11,984 | | | 0.21 | % | | $ | 8,684,906 | | | $ | 13,249 | | | 0.31 | % |
Noninterest-bearing demand deposits | | 6,541,421 | | | | | | | 3,728,459 | | | | | |
Other noninterest-bearing liabilities | | 494,990 | | | | | | | 325,838 | | | | | |
Stockholders’ equity | | 2,562,384 | | | | | | | 1,785,907 | | | | | |
Noncontrolling interest | | (2,714) | | | | | | | (2,231) | | | | | |
Total liabilities and stockholders’ equity | | $ | 20,878,111 | | | | | | | $ | 14,522,879 | | | | | |
Excess of interest-earning assets over interest-bearing liabilities | | $ | 7,150,867 | | | | | | | $ | 4,441,206 | | | | | |
Net interest and dividend income | | | | $ | 292,173 | | | | | | | $ | 220,934 | | | |
Interest rate spread | | | | | | 3.12 | % | | | | | | 3.30 | % |
Net interest margin | | | | | | 3.20 | % | | | | | | 3.40 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1)Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2)Average balances are net of unearned income and include nonperforming loans.
(3)Includes securities available-for-sale at fair value.
(4)Includes federal funds purchased.
Three months ended June 30, 2022: During the three months ended June 30, 2022, net interest income increased $46.9 million from the three months ended June 30, 2021 primarily due to a $55.0 million increase from the balance sheet size and mix from the BMBC Merger, offset by $5.7 million from the impact of PPP loans and a $2.4 million decrease in purchase accounting accretion. Net interest margin was 3.40% for the second quarter of 2022, a 17 basis point increase compared to 3.23% for the second quarter of 2021 due to a favorable increase of 38 basis points from the balance sheet size and mix, offset by reductions of 13 basis points from lower purchase accounting accretion, and 8 basis points from PPP loans.
Six months ended June 30, 2022: During the six months ended June 30, 2022, net interest income increased $71.2 million from the six months ended June 30, 2021. This increase included $96.8 million from balance sheet size and mix from the BMBC Merger, partially offset by $15.0 million of PPP income recognized during the six months ended June 30, 2021 and a $10.5 million decrease in purchase accounting accretion. Net interest margin was 3.20% for the six months ended June 30, 2022, a 20 basis point decrease compared to 3.40% for the six months ended June 30, 2021 reflecting a 20 basis points decrease from lower purchase accounting accretion.
The following table provides certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change (the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume.
| | | | | | | | | | | | | | | | | |
Six Months Ended June 30, | 2022 vs. 2021 |
(Dollars in thousands) | Volume | | Yield/Rate | | Net |
Interest Income: | | | | | |
Loans: | | | | | |
Commercial loans and leases(1) | $ | 30,424 | | | $ | (19,667) | | | $ | 10,757 | |
Commercial mortgage loans | 33,130 | | | (6,511) | | | 26,619 | |
Residential | 9,619 | | | (15,323) | | | (5,704) | |
Consumer | 6,352 | | | 3,378 | | | 9,730 | |
Loans held for sale | (2,859) | | | 2,183 | | | (676) | |
Mortgage-backed securities | 23,745 | | | 3,535 | | | 27,280 | |
Investment securities(2) | (171) | | | — | | | (171) | |
Other interest-earning assets | 116 | | | 2,023 | | | 2,139 | |
Favorable (unfavorable) | 100,356 | | | (30,382) | | | 69,974 | |
Interest expense: | | | | | |
Deposits: | | | | | |
Interest-bearing demand | 373 | | | — | | | 373 | |
Money market | 892 | | | (391) | | | 501 | |
Savings | 22 | | | — | | | 22 | |
Customer time deposits | 642 | | | (2,265) | | | (1,623) | |
Brokered certificates of deposits | (380) | | | (273) | | | (653) | |
FHLB advances | (2) | | | (3) | | | (5) | |
Trust preferred borrowings | 263 | | | 291 | | | 554 | |
Senior and subordinated debt | 500 | | | (941) | | | (441) | |
Other borrowed funds | 7 | | | — | | | 7 | |
Unfavorable (favorable) | 2,317 | | | (3,582) | | | (1,265) | |
Net change, as reported | $ | 98,039 | | | $ | (26,800) | | | $ | 71,239 | |
(1)Includes a tax-equivalent income adjustment related to commercial loans.
(2)Includes a tax-equivalent income adjustment related to municipal bonds.
Allowance for Credit Losses
We maintain the allowance for credit losses at an appropriate level based on our assessment of estimable and expected losses in the loan portfolio. Our allowance for credit losses is based on our historical loss experience that includes the inherent risk of our loans and various other factors including but not limited to, collateral values, trends in asset quality, level of delinquent loans and concentrations. Further, regional and national economic forecasts are considered in our expected credit losses. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments.
During the three months ended June 30, 2022, we recorded a provision for credit losses of $8.3 million, a net change of $75.8 million, as compared with the recovery of credit losses of $67.6 million for the three months ended June 30, 2021. The increase is primarily due to the release of ACL reserves in 2021 from positive economic forecasts following the impact of the COVID-19 pandemic.
During the six months ended June 30, 2022, we recorded a provision for credit losses of $27.2 million, a net change of $115.0 million, as compared with the recovery of credit losses of $87.7 million for the six months ended June 30, 2021. The increase was primarily due to the reasons described above and the initial provision for credit losses of $23.5 million recorded in connection with the BMBC Merger.
The allowance for credit losses increased to $142.0 million at June 30, 2022 from $94.5 million at December 31, 2021. The increase was primarily due to an initial ACL of $49.6 million recorded in connection with the BMBC Merger. The initial $49.6 million ACL recorded includes $23.5 million related to non-PCD loans, or the initial provision for credit loss recorded, and $26.1 million related to PCD loans, which does not have an initial income statement impact, but adjusts the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up). The ratio of allowance for credit losses to total loans and leases was 1.13% at June 30, 2022 and 1.19% at December 31, 2021.
The following tables detail the allocation of the ACL and show our net charge-offs (recoveries) by portfolio category:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial(1) | | Owner- occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer(3) | | Total |
As of June 30, 2022 | | | | | | | | | | | | | | |
Allowance for credit losses | | $ | 60,921 | | | $ | 5,510 | | | $ | 23,663 | | | $ | 5,058 | | | $ | 4,988 | | | $ | 41,830 | | | $ | 141,970 | |
% of ACL to total ACL | | 43 | % | | 3 | % | | 17 | % | | 4 | % | | 4 | % | | 29 | % | | 100 | % |
Loan portfolio balance | | $ | 3,107,740 | | | $ | 1,823,229 | | | $ | 3,321,654 | | | $ | 934,324 | | | $ | 773,138 | | | $ | 1,522,596 | | | $ | 11,482,681 | |
% to total loans and leases | | 27 | % | | 16 | % | | 29 | % | | 8 | % | | 7 | % | | 13 | % | | 100 | % |
Three months ended June 30, 2022 | | | | | | | | | | | | | | |
Charge-offs | | $ | 2,549 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,418 | | | $ | 3,967 | |
Recoveries | | 870 | | | 141 | | | 1 | | | — | | | 144 | | | 183 | | | 1,339 | |
Net charge-offs (recoveries) | | $ | 1,679 | | | $ | (141) | | | $ | (1) | | | $ | — | | | $ | (144) | | | $ | 1,235 | | | $ | 2,628 | |
Average loan balance | | $ | 3,002,961 | | | $ | 1,828,914 | | | $ | 3,315,971 | | | $ | 922,119 | | | $ | 783,907 | | | $ | 1,463,391 | | | $ | 11,317,263 | |
Ratio of net charge-offs (recoveries) to average gross loans | | 0.22 | % | | (0.03) | % | | NMF | | NMF | | (0.07) | % | | 0.34 | % | | 0.09 | % |
Six months ended June 30, 2022 | | | | | | | | | | | | | | |
Charge-offs | | $ | 6,188 | | | $ | 179 | | | $ | 37 | | | $ | — | | | $ | 186 | | | $ | 2,228 | | | $ | 8,818 | |
Recoveries | | 1,471 | | | 267 | | | 122 | | | — | | | 530 | | | 549 | | | 2,939 | |
Net charge-offs (recoveries) | | $ | 4,717 | | | $ | (88) | | | $ | (85) | | | $ | — | | | $ | (344) | | | $ | 1,679 | | | $ | 5,879 | |
Avg Loans | | $ | 2,976,763 | | | $ | 1,865,071 | | | $ | 3,351,333 | | | $ | 913,238 | | | $ | 811,572 | | | $ | 1,410,972 | | | $ | 11,328,949 | |
Ratio | | 0.32 | % | | (0.01) | % | | (0.01) | % | | NMF | | (0.09) | % | | 0.24 | % | | 0.10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial(1) | | Owner- occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer(3) | | Total |
As of December 31, 2021 | | | | | | | | | | | | | | |
Allowance for credit losses | | $ | 49,967 | | | $ | 4,574 | | | $ | 11,623 | | | $ | 1,903 | | | $ | 3,352 | | | $ | 23,088 | | | $ | 94,507 | |
% of ACL to total ACL | | 53 | % | | 5 | % | | 12 | % | | 2 | % | | 4 | % | | 24 | % | | 100 | % |
Loan portfolio balance | | $ | 2,270,319 | | | $ | 1,341,707 | | | $ | 1,881,510 | | | $ | 687,213 | | | $ | 546,667 | | | $ | 1,158,573 | | | $ | 7,885,989 | |
% to total loans and leases | | 28 | % | | 17 | % | | 24 | % | | 9 | % | | 7 | % | | 15 | % | | 100 | % |
Year ended December 31, 2021 | | | | | | | | | | | | | | |
Charge-offs | | $ | 23,592 | | | $ | 83 | | | $ | 73 | | | $ | 2,473 | | | $ | — | | | $ | 2,094 | | | $ | 28,315 | |
Recoveries | | 8,756 | | | 160 | | | 269 | | | — | | | 789 | | | 1,131 | | | 11,105 | |
Net charge-offs (recoveries) | | $ | 14,836 | | | $ | (77) | | | $ | (196) | | | $ | 2,473 | | | $ | (789) | | | $ | 963 | | | $ | 17,210 | |
Average loan balance | | $ | 2,463,933 | | | $ | 1,337,883 | | | $ | 1,994,995 | | | $ | 775,246 | | | $ | 628,411 | | | $ | 1,134,569 | | | $ | 8,335,037 | |
Ratio of net charge-offs (recoveries) to average gross loans | | 0.60 | % | | (0.01) | % | | (0.01) | % | | 0.32 | % | | (0.13) | % | | 0.08 | % | | 0.21 | % |
(1)Includes commercial small business leases and PPP loans.
(2)Excludes reverse mortgages.
(3)Includes home equity lines of credit, installment loans unsecured lines of credit and education loans.
See Note 8 to the unaudited Consolidated Financial Statements and Nonperforming Assets above for further information.
Noninterest Income
Three months ended June 30, 2022: During the three months ended June 30, 2022, noninterest income was $72.0 million, an increase of $23.0 million from $49.0 million during the three months ended June 30, 2021. The increase was driven by a $17.2 million increase in Wealth Management revenue, of which $15.2 million was attributable to the combination with Bryn Mawr Trust. In addition, 2Q 2022 included $3.5 million of other banking fees, including fees associated with our consumer lending partnerships, gain on sale of SBA loans and traditional bank service fees, $3.4 million in capital markets income, and $0.8 million in Cash Connect®. Partially offsetting the increase was a $2.2 million decline in mortgage banking fees primarily resulting from the decline in refinancing originations compared to the historically higher levels in 2Q 2021.
Six months ended June 30, 2022: During the six months ended June 30, 2022, noninterest income was $132.6 million, an increase of $35.8 million from $96.8 million during the six months ended June 30, 2021. This increase reflects a $34.1 million increase in Wealth Management revenue, of which $29.8 million was attributable to the combination with Bryn Mawr Trust, and $4.9 million in capital markets income, partially offset by a $7.9 million decrease in mortgage banking activities as described above.
For further information, see Note 4 to the unaudited Consolidated Financial Statements.
Noninterest Expense
Three months ended June 30, 2022: During the three month ended June 30, 2022, noninterest expense was $134.0 million, an increase of $38.0 million from $96.0 million for the three months ended June 30, 2021. The increase was primarily due to higher costs after the BMBC Merger. These higher costs included $15.8 million in salaries and benefits, a $6.2 million increase in equipment, occupancy and amortization expenses, and $4.7 million of higher variable operating costs. In addition, net corporate development and restructuring costs increased $7.9 million primarily due to the BMBC Merger.
Six months ended June 30, 2022: During the six months ended June 30, 2022, noninterest expense was $308.5 million, an increase of $116.9 million from $191.7 million for the six months ended June 30, 2021. The increase is due to the same reasons described above, which included net corporate development and restructuring costs of $57.7 million, salaries and benefits of $33.6 million, equipment, occupancy, and intangibles expenses of $12.8 million, and higher variable operating costs of $12.8 million.
Income Taxes
We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, Income Taxes, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded income tax expense of $22.4 million and $24.2 million during the three and six months ended June 30, 2022 compared to income tax expense of $31.7 million and $53.1 million for the same period in 2021.
Our effective tax rate was 26.9% and 27.1% for the three and six months ended June 30, 2022 compared to 24.9% and 24.8% for the same period in 2021. The effective tax rate for both the three and six months ended June 30, 2022 increased primarily due to $0.4 million of tax expense related to nondeductible acquisition costs during the six months ended June 30, 2022 combined with $1.4 million of tax expense related to nondeductible costs incurred from the sale of the BMTIA business during the three months ended June 30, 2022.
The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, research and development tax credits and excess tax benefits from recognized stock compensation. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options, nondeductible acquisition costs and a provision for state income tax expense. We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.
RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE
The following table provides a reconciliation of tangible book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.
| | | | | | | | | | | | | | |
(Dollars and share amounts in thousands, except per share amounts) | | June 30, 2022 | | December 31, 2021 |
Stockholders’ equity of WSFS | | $ | 2,315,360 | | | $ | 1,939,099 | |
Less: Goodwill and other intangible assets | | 1,019,857 | | | 547,231 | |
Tangible common equity (numerator) | | $ | 1,295,503 | | | $ | 1,391,868 | |
Shares of common stock outstanding (denominator) | | 63,587 | | | 47,609 | |
Book value per share of common stock | | $ | 36.41 | | | $ | 40.73 | |
Goodwill and other intangible assets | | 16.04 | | | 11.49 | |
Tangible book value per share of common stock | | $ | 20.37 | | | $ | 29.24 | |
CRITICAL ACCOUNTING ESTIMATES
The preparation of the unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for credit losses, business combinations, deferred taxes, fair value measurements and goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2022, it is possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policy involves more significant judgments and estimates. We have reviewed this critical accounting policy and estimates with the Audit Committee.
Allowance for Credit Losses
We maintain an allowance for credit losses (ACL) which represents our best estimate of expected losses in our financial assets, which include loans, leases and held-to-maturity debt securities. We establish our allowance in accordance with guidance provided in ASC 326, Financial Instruments – Credit Losses. The ACL includes two primary components: (i) an allowance established on financial assets which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on financial assets which do not share similar risk characteristics with any loan segment and is individually evaluated for credit losses (individual basis). We consider the determination of the allowance for credit losses to be critical because it requires significant judgment reflecting our best estimate of expected credit losses based on our historical loss experience, current conditions and economic forecasts. Our evaluation is based upon a continuous review of our financial assets, with consideration given to evaluations resulting from examinations performed by regulatory authorities. The allowance for credit losses increased to $142.0 million at June 30, 2022 from $94.5 million at December 31, 2021. The increase was primarily due to an initial ACL of $49.6 million recorded in connection with the BMBC Merger. See Note 8 to the unaudited Consolidated Financial Statements for further discussion of the ACL.
The calculation of expected credit losses is determined using a single scenario third-party economic forecast to adjust the calculated historical loss rates of the portfolio segments to incorporate the effects of current and future economic conditions. The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires us to make significant estimates, including modeling methodology, historical loss experience, relevant available information from internal and external sources relating to qualitative adjustment factors, prepayment speeds and reasonable and supportable forecasts about future economic conditions. The Company's economic forecast considers the general health of the economy, the interest rate environment, real estate pricing and market risk
The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables that our financial assets are more susceptible to, including unforeseen events such as natural disasters and pandemics, new information regarding existing financial assets, identification of additional problems assets, the fair value of underlying collateral, and other factors. These changes, both within and outside the Company’s control, may frequently update and have a material impact to our financial results.
Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on our financial assets, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACL because a wide variety of factors and inputs are considered in these estimates and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across the Company’s portfolio mix and segmentation. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As of June 30, 2022, the Company believes that its ACL was adequate.
Business Combinations
We account for business combinations under ASC 805, Business Combinations using the acquisition method of accounting and record the identifiable assets acquired, liabilities assumed, consideration paid, and any non-controlling interests of the acquired business at fair value at the acquisition date. The excess of consideration paid over the fair value of the net assets acquired is recorded as goodwill. The fair values are preliminary estimates subject to adjustments during the measurement period, which does not exceed one year after acquisition. The application of business combination principles, including the determination of the fair value of net assets acquired, requires the use of significant estimates and assumptions under ASC 820, Fair Value Measurement. See Note 3 to the unaudited Consolidated Financial Statements.
Determining estimated fair value requires a significant amount of judgment and estimates. If our assumptions change or errors are determined in its calculations, the fair value could materially change resulting in a change in our goodwill or identifiable net assets acquired, including identified intangible assets. As of June 30, 2022, the Company believes that the fair value of the assets acquired, liabilities assumed, consideration paid, and any non-controlling interests of the acquired business at fair value at the acquisition date was appropriately determined in accordance with GAAP.
RECENT REGULATORY DEVELOPMENTS
Recent regulatory developments at June 30, 2022 did not significantly change from our recent regulatory developments at December 31, 2021, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except as noted below.
FDIC Deposit Insurance Assessment Rates
On June 21, 2022 the FDIC issued a proposed rule to increase initial base deposit insurance assessment rates for insured depository institutions by 2 basis points, beginning with the first quarterly assessment period of 2023. The proposed assessment rate schedules would remain in effect unless and until the reserve ratio of the Deposit Insurance Fund meets or exceeds 2 percent. If the proposed rule is finalized as proposed, the FDIC insurance costs of insured depository institutions, including WSFS Bank, would generally increase.
Community Reinvestment Act
On May 5, 2022 the federal banking agencies issued a proposed rule that would substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods, under the Community Reinvestment Act (CRA). If the proposed rule is finalized as proposed, it may become more challenging and/or costly for WSFS Bank to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition or branch expansion.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is incorporated herein by reference to the information provided in Part I Item 2 (Interest Rate Sensitivity) of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b)Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting during the three months ended June 30, 2022.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated herein by reference to the information provided in Note 19 – Legal and Other Proceedings to the unaudited Consolidated Financial Statements.
Item 1A. Risk Factors
There have not been any material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, previously filed with the Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2020, the Board of Directors of the Company approved a share repurchase program authorizing the repurchase of 7,594,977 shares of common stock, or 15% of its outstanding shares as of March 31, 2020. During the second quarter of 2022, the Board of Directors of the Company approved an additional share repurchase authorization under the program of 6,358,727 shares of common stock, or 10% of its outstanding shares as of June 30, 2022. Under the program, repurchases may be made from time to time in the open market or through negotiated transactions, subject to market conditions and other factors, and in accordance with applicable securities laws. The program is consistent with our intent to return a minimum of 35% of annual net income to stockholders through dividends and share repurchases while maintaining capital ratios in excess of “well-capitalized” regulatory benchmarks.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Month | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1, 2022 - April 30, 2022 | | 96,000 | | | $ | 43.02 | | | 96,000 | | | 3,346,176 | |
May 1, 2022 - May 31, 2022 | | 741,000 | | | 39.89 | | | 741,000 | | | 2,605,176 | |
June 1, 2022 - June 30, 2022 | | 348,602 | | | 41.93 | | | 348,602 | | | 8,615,301 | |
Total | | 1,185,602 | | | $ | 40.74 | | | 1,185,602 | | | |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | |
Exhibit Number | | Description of Document |
| | |
31.1 | | |
31.2 | | |
32 | | |
101.INS | | XBRL Instance Document * |
101.SCH | | XBRL Schema Document * |
101.CAL | | XBRL Calculation Linkbase Document * |
101.LAB | | XBRL Labels Linkbase Document * |
101.PRE | | XBRL Presentation Linkbase Document * |
101.DEF | | XBRL Definition Linkbase Document * |
104 | | The cover page of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, filed with the SEC on August 4, 2022, is formatted in Inline XBRL. |
* Submitted as Exhibits 101 to this Quarterly Report on Form 10-Q are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | WSFS FINANCIAL CORPORATION |
| | |
Date: August 4, 2022 | | /s/ Rodger Levenson |
| | Rodger Levenson |
| | Chairman, President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: August 4, 2022 | | /s/ Dominic C. Canuso |
| | Dominic C. Canuso |
| | Executive Vice President and |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |