WSFS FINANCIAL CORP (WSFS) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WSFS Financial Corporation (the Company or WSFS) is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by the Company’s 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 $19.9 billion in assets and $64.5 billion in assets under management (AUM) and assets under administration (AUA) at December 31, 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, WSFS Bank has 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 December 31, 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. We also had three unconsolidated subsidiaries, WSFS Capital Trust III, Royal Bancshares Capital Trust I, and Royal Bancshares Capital Trust II. WSFS Bank had 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.
On January 1, 2023, WSFS completed the merger and brand conversion of West Capital and Cypress and has renamed the combined entity Bryn Mawr Capital Management, LLC. Bryn Mawr Capital Management, LLC is registered as an investment advisor with the U.S. Securities and Exchange Commission and is a wholly-owned subsidiary of WSFS.
Our banking business had a total loan and lease portfolio of $11.9 billion as of December 31, 2022, which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a $9.3 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 smart safes nationwide, and manages approximately $1.7 billion in total cash and services approximately 26,300 non-bank ATMs and 7,500 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 approximately 650 branded ATMs for WSFS Bank Customers, which is one of the largest branded ATM networks in our market.
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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 $64.5 billion of AUM and AUA at December 31, 2022. Bryn Mawr Trust® is our predominant Private Wealth Management brand, providing advisory, investment management and trustee services to institutions, affluent and high-net-worth individuals. The Bryn Mawr Trust Company of Delaware, formed by the merger of BMT-DE and Christiana Trust DE on April 1, 2022, provides personal trust and fiduciary services to families and individuals across the U.S. and internationally. WSFS Institutional Services® provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional, corporate clients and special purpose vehicles. Private Wealth Management serves high-net-worth clients and institutions by providing trustee and advisory services, financial planning, customized investment strategies, brokerage products such as annuities and traditional banking services such as credit and deposit products tailored to its clientele. Private Wealth Management includes businesses that operate under the bank’s charter, through a broker/dealer and as a registered investment advisor (RIA). It generates revenue through fee-only arrangements, net interest income and other fee-only services such as estate administration, trust tax planning and custody. 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.
As of December 31, 2022, we service our customers primarily from our 119 offices located in Pennsylvania (61), Delaware (39), New Jersey (17) Virginia (1) and Nevada (1), our ATM network, our website at www.wsfsbank.com, and our mobile apps.
Notable Items Impacting Results of Operations, Financial Condition and Business Outlook
Notable items in 2022 include the following:
•BMBC Merger
◦The merger was completed on January 1, 2022 with the purchase price consideration of $908.0 million and $497.2 million in net assets acquired resulted in $410.8 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 $65.2 million of corporate development and restructuring expenses during the year ended December 31, 2022, primarily related to the BMBC Merger.
•Balance Sheet
◦During the year ended December 31, 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.
•Credit Metrics
◦There was an increase in the allowance for credit losses (ACL) of $57.4 million during the year ended December 31, 2022, 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). See “Results of Operations - Provision/Allowance for Credit Losses (ACL)” for further information.
•Other Notable Items
◦During 2022, WSFS repurchased 4,151,117 shares of common stock under the Company's share repurchase program at an average price of $46.78 per share, for an aggregate purchase price of $194.2 million
◦KCMI and its loan portfolio was sold at par value for $55.5 million.
◦The business of BMTIA was sold to Patriot Growth Insurance Services, LLC.
◦We recognized a $6.0 million unrealized gain on our equity investment in cred.ai, a Philadelphia-based fintech partner that provides a mobile-based everyday card spending experience.
◦We contributed a total of $3.0 million to the WSFS CARES Foundation during 2022.
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FINANCIAL CONDITION
Total assets increased $4.1 billion, or 26%, to $19.9 billion as of December 31, 2022, compared to $15.8 billion as of December 31, 2021. These increases are primarily comprised of the following (in descending order of magnitude):
•Net loans and leases, excluding loans held for sale, increased $4.0 billion, primarily driven by the $3.5 billion of loans and leases acquired in the BMBC Merger and an increase of $457.0 million from our consumer partnerships, partially offset by the initial $49.6 million ACL recorded in connection with the BMBC Merger.
•Goodwill and intangible assets increased $410.8 million and $54.2 million, respectively, primarily due to the BMBC Merger. See Notes 3 and 11 to the Consolidated Financial Statements for additional information.
•Other assets increased $399.1 million primarily due to a $201.6 million increase on our tax asset related to unrealized losses on AFS securities and $153.6 million of BMT acquired assets.
•Total cash and cash equivalents decreased $695.7 million, primarily due to decreased deposits and increased lending activity, offset by cash acquired in the BMBC Merger.
•Total investment securities decreased $91.3 million:
◦Investment securities, held-to-maturity increased $1.0 billion 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.
◦Investment securities, available-for-sale decreased $1.1 billion, primarily due to the designation of AFS MBS to HTM as mentioned above, repayments of $1.0 billion and decreased market values on available-for-sale securities of $696.9 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 $70.4 million during the twelve months ended December 31, 2022 driven by a combination of lower origination volume and higher loans sales in our mortgage banking business during the year ended December 31, 2022.
Total liabilities increased $3.9 billion, or 28%, to $17.7 billion at December 31, 2022 compared to the prior year, primarily comprised of the following (in descending order of magnitude):
•Total deposits increased $3.0 billion, primarily driven by $4.1 billion of deposits assumed in the BMBC Merger, partially offset by declines due to a reduction in customer balances spread across most business lines.
•Other liabilities increased $417.2 million primarily due to a net increase of $298.5 million in collateral held on derivatives and derivative liabilities driven by rising interest rates and $124.6 million of BMT acquired liabilities, partially offset by $34.5 million lower accrued expenses reflecting the timing of settlement for debt security trades.
•Federal Home Loan Bank advances of $350.0 million were held over year end compared to none at December 31, 2021.
•Senior and subordinated debt increased $100.2 million due to the addition of subordinated notes assumed in the BMBC Merger.
Stockholders’ equity increased $266.0 million to $2.2 billion at December 31, 2022 compared to the prior year. The increase was primarily due to $908.0 million of WSFS common shares issued in connection with the BMBC Merger and earnings of $222.4 million during the year, partially offset by a decrease of $638.1 million in accumulated other comprehensive loss from market value decreases on investment securities resulting from the current rising interest rate environment, and significant levels of capital return to shareholders including $200.1 million from the repurchase of shares of common stock under our stock repurchase plan and shares withheld to cover tax liabilities, and the payment of dividends on our common stock of $35.7 million.
We repurchased 4,151,117 and 267,309 shares of our common stock in 2022 and 2021, respectively. We held 14,310,085 shares and 10,086,936 shares of our common stock as treasury shares at December 31, 2022 and 2021, respectively.
For further information on our regulatory capital requirements, refer to our Capital Resources discussion below.
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LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
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. PPP loans receive a zero percent risk weighting under the regulators' capital rules. 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. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
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 upon its capital levels in relation to various relevant capital measures, which include leveraged and risk-based capital measures and certain other factors. Under the Prompt Corrective Action framework of the Federal Deposit Insurance Corporation Act, depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At December 31, 2022, the Bank was in compliance with regulatory capital requirements and all of its regulatory ratios exceeded “well-capitalized” regulatory benchmarks. The Bank’s December 31, 2022 common equity Tier 1 capital ratio of 12.86%, Tier 1 capital ratio of 12.86%, total risk based capital ratio of 13.84% and Tier 1 leverage capital ratio of 10.29%, all remain substantially in excess of “well-capitalized” regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in the Bank's capital, the holding company held $205.8 million in cash to support potential dividends, acquisitions and strategic growth plans.
As part of our adoption of the 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, commercial, consumer, wealth and trust 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 December 31, 2022, the Corporation has $0.8 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 $4.6 billion. Borrowing availability at the Federal Reserve Discount Window was $736.2 million, and borrowing availability through the overnight fed funds lines totaled $1.0 billion.
During the year ended December 31, 2022, cash, cash equivalents and restricted cash decreased $0.7 billion to $0.8 billion from $1.5 billion as of December 31, 2021. Cash provided by operating activities was $480.9 million, primarily reflecting the cash impact of earnings. Cash used for investing activities was $137.4 million primarily due to purchases of loans held for investment of $393.2 million, and net purchases of available-for-sale debt securities of $202.4 million. These outflows were offset by $573.7 million of net cash from the BMBC Merger. Cash used by financing activities was $1.0 billion, primarily due to a $1.2 billion net decrease in deposits, $200.1 million for repurchases of common stock under the previously announced stock repurchase plan, and common stock dividends of $35.7 million, partially offset by $350.0 million of FHLB advances due to the receipt of fixed rate FHLB term advances as part of our routine balance sheet management.
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Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At December 31, 2022, we had $241.3 million in total contractual payments for ongoing leases that have remaining lease terms of less than one year to 39 years, which includes renewal options that are exercised at our discretion. For additional information on our operating leases see Note 10 to the Consolidated Financial Statements. At December 31, 2022, we had $350.0 million of 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 $23.4 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 13 to the Consolidated Financial Statements. At December 31, 2022, the Company had total commitments to extend credit of $2.8 billion, which are generally one year commitments. For additional information regarding commitments to extend credit, see Note 18 to the Consolidated Financial Statements.
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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:
| At December 31, | ||||||
|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2022 | 2021 | ||||
| Nonaccruing loans: | ||||||
| Commercial and industrial | $ | 6,770 | $ | 8,211 | ||
| Owner-occupied commercial | 386 | 811 | ||||
| Commercial mortgages | 5,159 | 2,070 | ||||
| Construction | 5,143 | 12 | ||||
| Residential | 3,199 | 3,125 | ||||
| Consumer | 2,145 | 2,380 | ||||
| Total nonaccruing loans | 22,802 | 16,609 | ||||
| Other real estate owned | 833 | 2,320 | ||||
| Restructured loans(1)(6) | 19,737 | 14,204 | ||||
| Total nonperforming assets | $ | 43,372 | $ | 33,133 | ||
| Past due loans: | ||||||
| Commercial | $ | 1,022 | $ | 1,357 | ||
| Residential | — | — | ||||
| Consumer(2) | 15,513 | 8,634 | ||||
| Total past due loans | $ | 16,535 | $ | 9,991 | ||
| Ratio of allowance for credit losses to total gross loans and leases(3) | 1.17 | % | 1.19 | % | ||
| Ratio of nonaccruing loans to total gross loans and leases (4) | 0.19 | 0.21 | ||||
| Ratio of nonperforming assets to total assets | 0.22 | 0.21 | ||||
| Ratio of allowance for credit losses to nonaccruing loans | 666 | 569 | ||||
| Ratio of allowance for credit losses to total nonperforming assets(5) | 350 | 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 delinquent, but still accruing, 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 $10.2 million between December 31, 2021 and December 31, 2022. This increase was primarily due to the transfer in of one commercial relationship totaling $5.5 million and one CRE relationship totaling $2.6 million during the period. These inflows were partially offset by a partial charge-off on the CRE relationship of $0.5 million, several smaller payoffs and the continued collection of principal payments on the majority of these loans. The ratio of nonperforming assets to total assets slightly increased from 0.21% at December 31, 2021 to 0.22% at December 31, 2022.
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The following table summarizes the changes in nonperforming assets during the periods indicated:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2022 | 2021 | |||||
| Beginning balance | $ | 33,133 | $ | 60,508 | |||
| Additions | 34,041 | 45,387 | |||||
| Collections | (17,293) | (47,477) | |||||
| Transfers to accrual | (922) | (494) | |||||
| Charge-offs | (5,587) | (24,791) | |||||
| Ending balance | $ | 43,372 | $ | 33,133 |
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.
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RESULTS OF OPERATIONS
2021 compared with 2020
For a discussion of our results for the year ended December 31, 2021 compared to the year ended December 31, 2020, please see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022.
2022 compared with 2021
We recorded net income attributable to WSFS of $222.4 million, or $3.49 per diluted common share, for the year ended December 31, 2022, a decrease of $49.1 million compared to $271.4 million, or $5.69 per diluted common share, for the year ended December 31, 2021.
•Net interest income for the year ended December 31, 2022 was $662.9 million, an increase of $229.2 million compared to 2021, primarily due to an increase from the balance sheet size and mix from the BMBC Merger and the benefits of our asset-sensitive balance sheet, offset by lower purchase accounting accretion and the impact of PPP loans. See “Net Interest Income” for further information.
•Our provision for credit losses increased $165.2 million in 2022, 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 and the initial provision for credit losses recorded in connection with the BMBC Merger. See “Provision/Allowance for Credit Losses” for further information.
•Noninterest income increased $74.7 million in 2022, primarily due to increased Wealth Management revenue that is primarily attributable to the BMBC Merger, Cash Connect®, higher other banking fees, and capital markets income, partially offset by a decline in our mortgage banking business. See “Noninterest Income” for further information.
•Noninterest expense increased $195.8 million in 2022, primarily due to higher costs after the BMBC Merger. These increases include salaries and benefits, net corporate development and restructuring costs, variable operating costs, and equipment, occupancy, and intangibles expense. In addition, 2021 included the previously disclosed Charter Oak legal settlement recovery. See “Noninterest Expense” for further information.
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Net Interest Income
The following table provides information regarding the average balances of, and yields/rates on, interest-earning assets and interest-bearing liabilities during the periods indicated:
| Year Ended December 31, | 2022 | 2021 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | AverageBalance | Interest &Dividends | Yield/Rate(1) | Average Balance | Interest & Dividends | Yield/Rate (1) | ||||||||||||||||
| Assets: | ||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||
| Loans:(2) | ||||||||||||||||||||||
| Commercial loans and leases | $ | 4,875,265 | $ | 253,293 | 5.21 | % | $ | 3,801,816 | $ | 183,782 | 4.84 | % | ||||||||||
| Commercial mortgage loans | 4,281,768 | 203,611 | 4.76 | 2,770,241 | 113,979 | 4.11 | ||||||||||||||||
| Residential | 790,650 | 35,420 | 4.48 | 636,443 | 42,063 | 6.61 | ||||||||||||||||
| Consumer | 1,543,704 | 86,743 | 5.62 | 1,134,569 | 49,330 | 4.35 | ||||||||||||||||
| Loans held for sale | 65,927 | 3,687 | 5.59 | 118,803 | 4,094 | 3.45 | ||||||||||||||||
| Total loans and leases | 11,557,314 | 582,754 | 5.05 | 8,461,872 | 393,248 | 4.65 | ||||||||||||||||
| Mortgage-backed securities(3) | 5,151,469 | 106,606 | 2.07 | 3,340,001 | 55,802 | 1.67 | ||||||||||||||||
| Investment securities(3) | 338,979 | 6,899 | 2.39 | 321,599 | 5,524 | 1.94 | ||||||||||||||||
| Other interest-earning assets | 878,097 | 7,556 | 0.86 | 1,320,229 | 1,795 | 0.14 | ||||||||||||||||
| Total interest-earning assets | 17,925,859 | 703,815 | 3.94 | 13,443,701 | 456,369 | 3.40 | ||||||||||||||||
| Allowance for credit losses | (140,916) | (161,770) | ||||||||||||||||||||
| Cash and due from banks | 243,579 | 144,778 | ||||||||||||||||||||
| Cash in non-owned ATMs | 551,108 | 454,803 | ||||||||||||||||||||
| Bank owned life insurance | 100,725 | 32,818 | ||||||||||||||||||||
| Other noninterest-earning assets | 1,783,340 | 989,590 | ||||||||||||||||||||
| Total assets | $ | 20,463,695 | $ | 14,903,920 | ||||||||||||||||||
| Liabilities and stockholders’ equity: | ||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||
| Interest-bearing demand | $ | 3,377,321 | $ | 7,441 | 0.22 | % | $ | 2,655,887 | $ | 2,262 | 0.09 | % | ||||||||||
| Money market | 3,918,756 | 13,536 | 0.35 | 2,740,573 | 3,218 | 0.12 | ||||||||||||||||
| Savings | 2,265,721 | 965 | 0.04 | 1,912,568 | 586 | 0.03 | ||||||||||||||||
| Customer time deposits | 1,103,336 | 5,626 | 0.51 | 1,065,137 | 7,332 | 0.69 | ||||||||||||||||
| Total interest-bearing customer deposits | 10,665,134 | 27,568 | 0.26 | 8,374,165 | 13,398 | 0.16 | ||||||||||||||||
| Brokered deposits | 36,461 | 613 | 1.68 | 70,090 | 1,525 | 2.18 | ||||||||||||||||
| Total interest-bearing deposits | 10,701,595 | 28,181 | 0.26 | 8,444,255 | 14,923 | 0.18 | ||||||||||||||||
| Federal Home Loan Bank advances | 12,841 | 538 | 4.19 | 184 | 5 | 2.72 | ||||||||||||||||
| Trust preferred borrowings | 90,337 | 3,482 | 3.85 | 67,011 | 1,274 | 1.90 | ||||||||||||||||
| Senior and subordinated debt | 248,389 | 8,246 | 3.32 | 192,243 | 6,497 | 3.38 | ||||||||||||||||
| Other borrowed funds(4) | 47,076 | 478 | 1.02 | 21,661 | 21 | 0.10 | ||||||||||||||||
| Total interest-bearing liabilities | 11,100,238 | 40,925 | 0.37 | 8,725,354 | 22,720 | 0.26 | ||||||||||||||||
| Noninterest-bearing demand deposits | 6,376,459 | 4,008,140 | ||||||||||||||||||||
| Other noninterest-bearing liabilities | 590,814 | 323,715 | ||||||||||||||||||||
| Stockholders’ equity of WSFS | 2,398,871 | 1,848,904 | ||||||||||||||||||||
| Noncontrolling interest | (2,687) | (2,193) | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 20,463,695 | $ | 14,903,920 | ||||||||||||||||||
| Excess of interest-earning assets over interest-bearing liabilities | $ | 6,825,621 | $ | 4,718,347 | ||||||||||||||||||
| Net interest and dividend income | $ | 662,890 | $ | 433,649 | ||||||||||||||||||
| Interest rate spread | 3.57 | % | 3.14 | % | ||||||||||||||||||
| Net interest margin | 3.71 | % | 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 held-to-maturity (at amortized cost) and securities available-for-sale (at fair value).
(4)Includes federal funds purchased.
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Net interest income increased $229.2 million, or 53%, to $662.9 million in 2022, compared to 2021 primarily due to a $191.2 million increase from the balance sheet size and mix due to the BMBC Merger and $71.9 million from the benefits of our asset-sensitive balance sheet. Offsetting these increases were $18.5 million lower PPP income and a $15.4 million decrease in purchase accounting accretion. Net interest margin increased 48 bps to 3.71% in 2022 from 3.23% in 2021. The increase was primarily due to 47 bps from the benefits of our asset-sensitive balance sheet and 22 bps increase from balance sheet size and mix due to the BMBC Merger, partially offset by 15 bps from lower purchase accounting accretion and 6 bps from the impact of PPP loans in the prior year.
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.
| Year Ended December 31, | 2022 vs. 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Volume | Yield/Rate | Net | |||||||
| Interest Income: | ||||||||||
| Loans: | ||||||||||
| Commercial loans and leases(1) | $ | 54,701 | $ | 14,810 | $ | 69,511 | ||||
| Commercial mortgage loans | 69,490 | 20,142 | 89,632 | |||||||
| Residential | 8,785 | (15,428) | (6,643) | |||||||
| Consumer | 20,674 | 16,739 | 37,413 | |||||||
| Loans held for sale | (2,294) | 1,887 | (407) | |||||||
| Mortgage-backed securities | 35,241 | 15,563 | 50,804 | |||||||
| Investment securities(2) | 260 | 1,115 | 1,375 | |||||||
| Other interest-earning assets | (810) | 6,571 | 5,761 | |||||||
| Unfavorable | 186,047 | 61,399 | 247,446 | |||||||
| Interest expense: | ||||||||||
| Deposits: | ||||||||||
| Interest-bearing demand | 819 | 4,360 | 5,179 | |||||||
| Money market | 1,891 | 8,427 | 10,318 | |||||||
| Savings | 135 | 244 | 379 | |||||||
| Customer time deposits | 258 | (1,964) | (1,706) | |||||||
| Brokered certificates of deposits | (617) | (295) | (912) | |||||||
| FHLB advances | 528 | 5 | 533 | |||||||
| Trust preferred borrowings | 559 | 1,649 | 2,208 | |||||||
| Senior and subordinated debt | 1,866 | (117) | 1,749 | |||||||
| Other borrowed funds | 51 | 406 | 457 | |||||||
| Favorable | 5,490 | 12,715 | 18,205 | |||||||
| Net change, as reported | $ | 180,557 | $ | 48,684 | $ | 229,241 |
(1)Includes a tax-equivalent income adjustment related to commercial loans.
(2)Includes a tax-equivalent income adjustment related to municipal bonds.
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Investment Securities
The following table details the maturity and weighted average yield of the available-for-sale investment portfolio as of December 31, 2022:
| (Dollars in thousands) | Maturing During 2023 | Maturing From 2024 Through 2027 | Maturing From 2028 Through 2032 | Maturing After 2032 | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Collateralized mortgage obligations (CMO) | ||||||||||||||||||
| Amortized cost | $ | — | $ | 24,810 | $ | 70,629 | $ | 513,395 | $ | 608,834 | ||||||||
| Weighted average yield | — | % | 2.19 | % | 2.05 | % | 1.86 | % | 1.89 | % | ||||||||
| Fannie Mae (FNMA) mortgage-backed securities (MBS) | ||||||||||||||||||
| Amortized cost | — | 57,558 | 202,105 | 3,563,373 | 3,823,036 | |||||||||||||
| Weighted average yield | — | % | 2.25 | % | 2.23 | % | 1.97 | % | 1.99 | % | ||||||||
| Freddie Mac (FHLMC) MBS | ||||||||||||||||||
| Amortized cost | — | 647 | 45,260 | 89,647 | 135,554 | |||||||||||||
| Weighted average yield | — | % | 2.45 | % | 2.46 | % | 3.05 | % | 2.85 | % | ||||||||
| Ginnie Mae (GNMA) MBS | ||||||||||||||||||
| Amortized cost | — | — | 758 | 38,358 | 39,116 | |||||||||||||
| Weighted average yield | — | % | — | % | 3.03 | % | 2.89 | % | 2.90 | % | ||||||||
| Government-sponsored enterprises (GSE) | ||||||||||||||||||
| Amortized cost | — | — | 147,025 | 80,985 | 228,010 | |||||||||||||
| Weighted average yield | — | % | — | % | 1.27 | % | 1.32 | % | 1.29 | % | ||||||||
| Total amortized cost | $ | — | $ | 83,015 | $ | 465,777 | $ | 4,285,758 | $ | 4,834,550 | ||||||||
| Weighted average yield | — | % | 2.24 | % | 1.93 | % | 1.97 | % | 1.97 | % |
As of December 31, 2022, WSFS does not have any tax-exempt securities within the available-for-sale investment portfolio. Yields are calculated on a weighted average basis using the investments amortized cost and respective average yields for each investment category. Expected maturities of mortgage-backed securities may differ from contractual maturities due to calls or prepay obligations.
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Provision/Allowance for Credit Losses (ACL)
We maintain an ACL at an appropriate level based on our assessment of estimable and probable losses in the loan portfolio, which we evaluate in accordance with applicable accounting principles, as discussed further in “Nonperforming Assets.” Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments.
For the year ended December 31, 2022, we recorded a provision for credit losses of $48.1 million, a net change of $165.2 million, compared to the recovery of credit losses of $117.1 million in 2021. The increase was primarily due to the release of ACL reserves in 2021 from positive economic forecasts following the impact of the COVID-19 pandemic and the initial provision for credit losses of $23.5 million recorded in connection with the BMBC Merger.
The ACL was $151.9 million at December 31, 2022 compared to $94.5 million at December 31, 2021. The increase of the ACL 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 1.17% at December 31, 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 December 31, 2022 | |||||||||||||||||||||||||||
| Allowance for credit losses | $ | 59,394 | $ | 6,019 | $ | 21,473 | $ | 6,987 | $ | 4,668 | $ | 53,320 | $ | 151,861 | |||||||||||||
| % of ACL to total ACL | 39 | % | 4 | % | 14 | % | 5 | % | 3 | % | 35 | % | 100 | % | |||||||||||||
| Loan portfolio balance | $ | 3,134,326 | $ | 1,809,582 | $ | 3,351,084 | $ | 1,044,049 | $ | 759,465 | $ | 1,810,930 | $ | 11,909,436 | |||||||||||||
| % to total loans and leases | 26 | % | 15 | % | 28 | % | 9 | % | 7 | % | 15 | % | 100 | % | |||||||||||||
| Year ended December 31, 2022 | |||||||||||||||||||||||||||
| Charge-offs | $ | 19,004 | $ | 179 | $ | 581 | $ | — | $ | 186 | $ | 7,520 | $ | 27,470 | |||||||||||||
| Recoveries | 6,112 | 278 | 223 | 2,567 | 665 | 793 | 10,638 | ||||||||||||||||||||
| Net charge-offs (recoveries) | $ | 12,892 | $ | (99) | $ | 358 | $ | (2,567) | $ | (479) | $ | 6,727 | $ | 16,832 | |||||||||||||
| Average loan balance | $ | 3,043,836 | $ | 1,831,428 | $ | 3,319,687 | $ | 962,082 | $ | 787,273 | $ | 1,543,704 | $ | 11,488,010 | |||||||||||||
| Ratio of net charge-offs (recoveries) to average gross loans | 0.42 | % | (0.01) | % | 0.01 | % | (0.27) | % | (0.06) | % | 0.44 | % | 0.15 | % |
| (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 | $ | 542,733 | $ | 1,158,573 | $ | 7,882,055 | |||||||||||||
| % 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.
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Noninterest Income
Noninterest income increased $74.7 million to $260.1 million in 2022 from $185.5 million in 2021. This increase reflects a $61.6 million increase in Wealth Management revenue, of which $55.9 million was attributable to the combination with Bryn Mawr Trust; $12.7 million from Cash Connect® driven by the rising rate environment and continued growth in the smart safe space; $12.5 million in other banking fees, including fees associated with our consumer lending partnerships, gain on sale of SBA loans and traditional bank service fees; and $7.9 million in capital markets income. The increase was partially offset by a $15.9 million decrease in mortgage banking activities primarily resulting from the decline in refinancing originations compared to the historically higher levels in 2021. Our diverse fee-based businesses support sustainability of noninterest income through economic cycles.
Noninterest Expenses
Noninterest expense increased $195.8 million to $574.3 million in 2022 from $378.5 million in 2021. The increase was primarily due to higher costs after the BMBC Merger. These higher costs include salaries and benefits of $69.7 million; net corporate development and restructuring costs of $52.2 million; higher variable operating costs of $28.0 million, including $7.3 million from Cash Connect®; and $25.1 million from equipment, occupancy, and intangibles expense. In addition, 2021 included a previously disclosed $15.0 million recovery of legal settlement associated with Charter Oak.
Income Taxes
We recorded $78.0 million of income tax expense for the year ended December 31, 2022 compared to $86.1 million for the year ended December 31, 2021. The decrease in income tax expense was primarily driven by a decrease in income before taxes of $57.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The effective tax rates for the years ended December 31, 2022 and 2021 were 25.9% and 24.1%, respectively. The effective tax rate for year ended December 31, 2022 increased primarily due to higher state income taxes associated with the BMBC Merger. In addition, the 2022 effective tax rate reflects the impact of the write-off of $6.7 million of nondeductible goodwill related to the sale of the BMT Insurance Advisors business. Further, the tax expense associated with nondeductible acquisition costs in 2022 decreased compared to 2021. Nondeductible acquisition costs of $1.8 million were recognized during the year ended December 31, 2022 compared to $3.9 million incurred in 2021.
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/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.
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SEGMENT INFORMATION
For financial reporting purposes, our business has three reporting segments: WSFS Bank, Cash Connect®, and Wealth Management. The WSFS Bank segment provides loans and leases and other financial products to commercial and consumer customers. Cash Connect® provides ATM vault cash, smart safe and other cash logistics services in the U.S 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 smart safes nationwide. 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.
WSFS Bank Segment
The WSFS Bank segment income before taxes decreased $83.2 million, or 28%, in 2022 compared to 2021 primarily due to a $161.6 million increase in the provision for credit losses due to the release of ACL reserves in 2021 from positive economic forecasts following the impact of the COVID-19 pandemic the initial provision for credit losses of $23.5 million recorded in connection with the BMBC Merger. In addition, external operating expenses increased $137.7 million, or 42%, reflecting the BMBC Merger. These increases were partially offset by an increase in external net interest income of $227.9 million, or 54%.
Cash Connect® Segment
The Cash Connect® segment income before taxes decreased to $7.3 million in 2022 from $10.2 million in 2021. During 2022, the Cash Connect® segment focused on expanding smart safe and ATM managed services to increase fee income while optimizing funding source composition and operational efficiency in the rapidly rising interest rate environment.. The interest rate environment materially increased vault operating expenses, resulting in a full-year 2022 ROA for the Cash Connect® segment of 1.01%, a decrease of 67 bps in comparison with full-year 2021. Cash Connect® had $1.7 billion in total cash managed at December 31, 2022 and 2021. At year-end 2022, Cash Connect® serviced approximately 26,300 non-bank ATMs and approximately 7,500 retail smart safes nationwide compared to approximately 27,400 non-bank ATMs and approximately 6,300 smart safes at year-end 2021.
Wealth Management Segment
The Wealth Management segment income before taxes increased $28.9 million in 2022 compared to 2021, primarily attributable to the combination with Bryn Mawr Trust and growth in our institutional trust activity. At December 31, 2022, Wealth Management had AUA/AUM of $64.5 billion, an 87% increase from 2021 balances. WSFS Institutional Services® ended 2022 as the securitization industry's fifth most active trustee for U.S. ABS and MBS according to Asset-Backed Alert’s ABS Database.
Segment financial information for the years ended December 31, 2022, 2021 and 2020 is provided in Note 22 to the Consolidated Financial Statements.
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ASSET/LIABILITY MANAGEMENT
Our primary asset/liability management goal is to optimize long term net interest income opportunities within the constraints of managing interest rate risk, ensuring adequate liquidity and funding and maintaining a strong capital base.
In general, interest rate risk is mitigated by closely matching the maturities or repricing periods of interest-sensitive assets and liabilities to ensure a favorable interest rate spread. We regularly review our interest-rate sensitivity, and use a variety of strategies as needed to adjust that sensitivity within acceptable tolerance ranges established by management and our Board of Directors. Changing the relative proportions of fixed-rate and adjustable-rate assets and liabilities is one of our primary strategies to accomplish this objective.
The matching of assets and liabilities may be analyzed using a number of methods including by examining the extent to which such assets and liabilities are “interest-rate sensitive” and by monitoring our interest-sensitivity gap. An interest-sensitivity gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing within a defined period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets repricing within a defined period. For additional information related to interest rate sensitivity, see "Quantitative and Qualitative Disclosures About Market Risk."
The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at December 31, 2022 are shown in the following table:
| (Dollars in thousands) | Less thanOne Year | One to FiveYears | Five to Fifteen Years | Over Fifteen Years | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest-rate sensitive assets: | |||||||||||||||||||
| Loans(1): | |||||||||||||||||||
| Commercial loans and leases | $ | 4,350,531 | $ | 1,406,598 | $ | 320,488 | $ | 9,889 | $ | 6,087,506 | |||||||||
| Commercial mortgage loans | 2,326,449 | 852,280 | 181,065 | 4,115 | 3,363,909 | ||||||||||||||
| Residential(2) | 143,486 | 272,254 | 268,579 | 91,157 | 775,476 | ||||||||||||||
| Consumer | 943,251 | 641,895 | 202,348 | 3,451 | 1,790,945 | ||||||||||||||
| Loans held for sale | 47,994 | 1,693 | 2,196 | 1,460 | 53,343 | ||||||||||||||
| Investment securities, available-for-sale | 713,092 | 1,875,009 | 2,185,852 | 253,031 | 5,026,984 | ||||||||||||||
| Investment securities, held-to-maturity | 97,085 | 312,877 | 551,571 | 150,096 | 1,111,629 | ||||||||||||||
| Other interest-earning assets | 24,116 | — | — | — | 24,116 | ||||||||||||||
| Total interest-rate sensitive assets: | $ | 8,646,004 | $ | 5,362,606 | $ | 3,712,099 | $ | 513,199 | $ | 18,233,908 | |||||||||
| Interest-rate sensitive liabilities: | |||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||
| Interest-bearing demand | $ | 1,673,341 | $ | — | $ | — | $ | — | $ | 1,673,341 | |||||||||
| Savings | 1,209,688 | — | — | — | 1,209,688 | ||||||||||||||
| Money market | 2,951,916 | — | — | — | 2,951,916 | ||||||||||||||
| Customer time deposits | 863,005 | 236,343 | 1,682 | — | 1,101,030 | ||||||||||||||
| Trust preferred borrowings | 90,442 | — | — | — | 90,442 | ||||||||||||||
| Senior and subordinated debt | 100,000 | 148,169 | — | — | 248,169 | ||||||||||||||
| Other borrowed funds | 155,751 | — | — | — | 155,751 | ||||||||||||||
| Total interest-rate sensitive liabilities: | $ | 7,394,143 | $ | 384,512 | $ | 1,682 | $ | — | $ | 7,780,337 | |||||||||
| Excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap) | $ | 1,251,861 | $ | 4,978,094 | $ | 3,710,417 | $ | 513,199 | $ | 10,453,571 | |||||||||
| One-year interest-rate sensitive assets/interest-rate sensitive liabilities | 116.93 | % | |||||||||||||||||
| One-year interest-rate sensitive gap as a percent of total assets | 6.29 | % |
(1)Loan balances exclude nonaccruing loans, deferred fees and costs
(2)Includes reverse mortgage loans
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Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which contractually reprice within the rate period may not reprice at the same price, at the same time or with the same frequency. It is also important to consider that the table represents a specific point in time. Variations can occur as we adjust our interest sensitivity position throughout the year.
To provide a more accurate position of our one-year gap, certain deposit classifications are based on the interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. For the purpose of this analysis, we estimate, based on historical trends of our deposit accounts, with the exception of certain deposits estimated at 100%, that the majority of our money market deposits are 75%, and the majority of our savings and interest-bearing demand deposits are 50% sensitive to interest rate changes. Accordingly, these interest-sensitive portions are classified in the “Less than One Year” category with the remainder in the “Over Five Years” category. Deposit rates other than time deposit rates are variable. Changes in deposit rates are generally subject to local market conditions and our discretion and are not indexed to any particular rate.
Impact of Inflation
Our Consolidated Financial Statements have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without consideration of the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the price of goods and services.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. For a description of certain financial instruments to which we are party and which expose us to certain credit risk not recognized in our financial statements, see Note 18 to the Consolidated Financial Statements.
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CRITICAL ACCOUNTING ESTIMATES
The discussion and analyses of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with U.S. GAAP and general practices within the banking industry. The significant accounting policies of the Company are described in Note 2 to the Consolidated Financial Statements. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that may materially affect the reported amounts of assets, liabilities, revenues 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. 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. See Note 8 to the 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 Control’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 December 31, 2022, the Company believes that its ACL was adequate.
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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 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 an adjustment to our goodwill or identifiable net assets acquired, including identified intangible assets. As of December 31, 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.
For information on Recent Accounting Pronouncements see Note 2 to the Consolidated Financial Statements.
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