WSFS FINANCIAL CORP (WSFS) FY 2021 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 $15.8 billion in assets and $34.6 billion in assets under management (AUM) and assets under administration (AUA) at December 31, 2021, WSFS Bank is the oldest and largest locally-managed bank and trust company headquartered in the Delaware and Greater Philadelphia 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 189 years. In addition to its focus on stellar customer experiences, WSFS Bank has 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, making a better life for all 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, 2021, we had six consolidated subsidiaries: WSFS Bank, WSFS Wealth Management, LLC (Powdermill®), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress), Christiana Trust Company of Delaware® (Christiana Trust DE) and WSFS SPE Services, LLC. We also had one unconsolidated subsidiary, WSFS Capital Trust III. 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®).
Our banking business had a total loan and lease portfolio of $7.9 billion as of December 31, 2021, which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a $6.2 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, retail securities and insurance brokerage through our retail branches, and mortgage and title services in collaboration with WSFS Mortgage®. WSFS Mortgage® is a mortgage banking company and abstract and title company specializing in a variety of residential mortgage and refinancing solutions. Our leasing business is conducted by NewLane Finance®. 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 in the U.S. As of December 31, 2021, Cash Connect® manages approximately $1.7 billion in total cash and services approximately 27,400 non-bank ATMs and approximately 6,300 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. As of December 31, 2021, Cash Connect® also supports over 600 owned and branded ATMs for WSFS Bank, which has 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 $34.6 billion of AUM and AUA at December 31, 2021. WSFS Wealth® Investments provides financial advisory services along with insurance 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. The trust division of WSFS, comprised of WSFS Institutional Services® and Christiana Trust DE, provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients and special purpose vehicles. Christiana Trust DE, a subsidiary of WSFS, 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 Client Management 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 December 31, 2021, we service our customers primarily from our 112 offices located in Pennsylvania (52), Delaware (42), New Jersey (16) Virginia (1) and Nevada (1), our ATM network, our website at www.wsfsbank.com, and our mobile apps.
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Notable Items Impacting Results of Operations, Financial Condition and Business Outlook
Notable items in 2021 include the following:
•Bryn Mawr Trust Acquisition
◦We recorded $13.0 million of corporate development and restructuring expenses during the year ended December 31, 2021 primarily related to our merger with Bryn Mawr Bank Corporation (BMBC), a Pennsylvania corporation and the parent holding company of The Bryn Mawr Trust Company, a Pennsylvania chartered bank and wholly owned subsidiary of BMBC. Throughout this document, we refer to these acquired entities collectively as “Bryn Mawr Trust.”
◦The merger was completed on January 1, 2022 with the purchase price consideration of $908 million to acquire or assume the following (at carrying value):
▪Total assets of $5.0 billion, including $3.5 billion in loans and leases,
▪Total liabilities of $4.4 billion, including $4.1 billion in deposits, and
▪Total AUM and AUA of $23.6 billion.
◦Our bank technology, branding and branch conversion is scheduled to occur later in the first quarter of 2022, with our Trust and Wealth integration expected to follow in late 2022 or early 2023.
◦Balance Sheet
◦On June 15, 2021, WSFS completed the redemption of $100.0 million in aggregate principal amount of our 4.50% fixed-to-floating rate senior notes due 2026 (the 2026 Notes). We recorded a $1.1 million loss of debt extinguishment to recognize the remaining unamortized debt issue costs associated with these notes.
◦During the year ended December 31, 2021, our balance sheet was significantly impacted by continued high levels of excess liquidity due to deposit growth stemming from strong Customer relationships across all business lines coupled with elevated loan payoffs. We used a portion of the excess liquidity to purchase $3.5 billion of investment securities, available-for-sale, and to pay down our borrowings.
•Credit Metrics
◦There was a reduction in the allowance for credit losses (ACL) of $134.3 million during the year ended December 31, 2021, as a result of the future recovery in our economic forecasts used in the ACL model and improved credit quality metrics with notable declines in our problem assets and delinquencies. See “Results of Operations - Provision/Allowance for Credit Losses (ACL)” for further information.
•Other Notable Items
◦During 2021, we recorded a $4.4 million net gain on the liquidation of our investment in Social Finance, Inc. (SoFi). We used $1.0 million of the proceeds to make a contribution to the WSFS CARES Foundation to further fund support to our expanded communities.
◦During the third quarter of 2021, we launched our strategic partnership with Upstart Holdings, Inc. (Upstart), a leading white label lending-as-a-service platform provider specializing in risk-based priced unsecured consumer loans.
◦In October 2021, Michelle L. Burroughs joined the Bank as Vice President, Director of Diversity, Equity and Inclusion (DE&I), supporting WSFS in creating and delivering a work environment designed to foster a culture of inclusion and ensure the long-term sustainability of the Company’s DE&I efforts.
◦During 2021, we resolved all outstanding legal matters associated with Nature's Healing Trust and Charter Oak. In the fourth quarter of 2021, we recognized $15.0 million legal settlement recovery associated with Charter Oak.
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FINANCIAL CONDITION
Total assets increased $1.5 billion, or 10%, to $15.8 billion as of December 31, 2021, compared to $14.3 billion as of December 31, 2020. These increases are primarily comprised of the following (in descending order of magnitude):
•Investment securities, available-for-sale: Investment securities, available for sale increased $2.7 billion, or 106%, primarily due to $3.5 billion in purchases partially offset by repayments of $697.5 million, decreased market-values on available-for-sale securities of $93.8 million, and sales of $14.1 million.
•Loans and leases, net of allowance: Loans and leases, net of allowance, decreased $1.0 billion, or 11%, reflecting a $782.4 million decline in commercial and industrial loans that included a $719.7 million decrease due to forgiveness of PPP loans and higher loan payoffs, a $227.8 million decline in residential loans, largely due to non-relationship run-off portfolios acquired through the Beneficial Bancorp, Inc. (Beneficial) acquisition, and a $204.6 million decline in commercial mortgage loans due to higher loan payoffs. Partially offsetting these decreases were $103.4 million of growth in our commercial small business leases portfolio, and a reduction of $134.3 million in our allowance for credit losses as described above.
•Cash, cash equivalents, and restricted cash: Cash, cash equivalents, and restricted cash decreased $121.8 million, or 7%, primarily reflecting our purchases of available-for-sale investment securities, as noted above, partially offset by elevated customer deposits due to strong relationships across all of our lending and fee based business lines.
•Loans, held for sale: Loans, held for sale are recorded at fair value and decreased $84.2 million, or 43%, driven by a combination of lower origination volume and higher loans sales in our mortgage banking business.
•Investment securities, held-to-maturity: Investment securities, held-to-maturity decreased $21.1 million, or 19%, primarily reflecting repayments, maturities and calls during the year.
Total liabilities increased $1.3 billion, or 10%, to $13.8 billion at December 31, 2021 compared to the prior year, primarily comprised of the following (in descending order of magnitude):
•Total Deposits: Total deposits increased $1.4 billion, or 12%, to $13.2 billion, primarily due to an increase in customer funding, reflecting continued elevated deposits from strong customer relationships across all lending and fee based business lines, including our trust line of business in Wealth Management, which had $1.2 billion in deposits as of December 31, 2021, an increase of $750.8 million from the prior year. The ratio of net loans and leases (including loans held for sale) to customer deposits was 60% at December 31, 2021 reflecting significant liquidity capacity.
•Senior debt: Senior debt decreased $98.7 million due to the redemption of the 2026 Notes, as described above.
•Other liabilities: Other liabilities increased $14.4 million, primarily due to $17.7 million reflecting the timing of settlements for debt security trades, partially offset by a decrease of $5.8 million in certain retirement plan liabilities.
Stockholders’ equity increased $147.4 million to $1.9 billion at December 31, 2021 compared to $1.8 billion at December 31, 2020. The increase was primarily due to earnings of $271.4 million during the year, partially offset by $93.8 million in unfavorable market-value changes on available-for-sale securities, $24.2 million in common stock dividends paid and $13.3 million related to share repurchases during 2021.
We repurchased 267,309 and 3,950,855 shares of our common stock in 2021 and 2020, respectively. We held 10,086,936 shares and 9,819,627 shares of our common stock as treasury shares at December 31, 2021 and 2020, respectively.
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.
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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, 2021, 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, 2021 common equity Tier 1 capital ratio of 15.11%, Tier 1 capital ratio of 15.11%, total risk based capital ratio of 15.91% and Tier 1 leverage capital ratio of 10.44%, 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 $103.7 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 and 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.
During the year ended December 31, 2021, cash, cash equivalents and restricted cash decreased $121.8 million to $1.5 billion from $1.7 billion as of December 31, 2020. Cash provided by operating activities was $125.6 million, primarily reflecting the cash impact of earnings. Cash used in investing activities was $1.5 billion primarily due to net purchases of available-for-sale debt securities of $2.8 billion partially offset by $1.3 billion from decreased lending activity related to PPP loan forgiveness and meaningful payoffs and paydowns in the commercial loan portfolio. Cash provided by financing activities was $1.2 billion, primarily due to a $1.4 billion net increase in deposits, as a result of the increase in customer funding discussed above, partially offset by the redemption of $100.0 million in aggregate principal amount of the 2026 Notes, liquidity management and common stock dividends of $24.2 million, $13.3 million for repurchases of common stock under the previously announced stock repurchase plan, and $6.6 million for repayment of FHLB advances due to the termination of fixed rate FHLB term advances as part of our routine balance sheet management.
Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At December 31, 2021, we had $250.5 million in total contractual payments for ongoing leases have remaining lease terms of less than 1 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 Consolidated Financial Statements. At December 31, 2021, 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. We are also contractually obligated make interest payments on our long-term debt through their respective maturities. For additional information regarding long-term debt, see Note 12 to the Consolidated Financial Statements. At December 31, 2021, the Company had total commitments to extend credit of $2.5 billion, which are generally one year commitments. For additional information regarding commitments to extend credit, see Note 17 to the Consolidated Financial Statements.
In 2022, we plan to invest approximately $15 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 improvements.
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NONPERFORMING ASSETS
Nonperforming assets (NPAs) include nonaccruing loans, other real estate owned (OREO) and restructured loans. Nonaccruing loans are those on which the accrual of interest has ceased. 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) | 2021 | 2020 | ||||
| Nonaccruing loans: | ||||||
| Commercial and industrial | $ | 8,211 | $ | 13,816 | ||
| Owner-occupied commercial | 811 | 5,360 | ||||
| Commercial mortgages | 2,070 | 17,175 | ||||
| Construction | 12 | — | ||||
| Residential | 3,125 | 3,247 | ||||
| Consumer | 2,380 | 2,310 | ||||
| Total nonaccruing loans | 16,609 | 41,908 | ||||
| Other real estate owned (OREO) | 2,320 | 3,061 | ||||
| Restructured loans(1)(6) | 14,204 | 15,539 | ||||
| Total nonperforming assets (NPAs) | $ | 33,133 | $ | 60,508 | ||
| Past due loans: | ||||||
| Commercial | $ | 1,357 | $ | 5,634 | ||
| Residential | — | 25 | ||||
| Consumer(2) | 8,634 | 11,035 | ||||
| Total past due loans | $ | 9,991 | $ | 16,694 | ||
| Ratio of allowance for credit losses to total gross loans and leases(3) | 1.19 | % | 2.51 | % | ||
| Ratio of nonaccruing loans to total gross loans and leases (4) | 0.21 | 0.46 | ||||
| Ratio of nonperforming assets to total assets | 0.21 | 0.42 | ||||
| Ratio of allowance for credit losses to nonaccruing loans | 569 | 546 | ||||
| Ratio of allowance for credit losses to total nonperforming assets(5) | 285 | 378 |
(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.
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Nonperforming assets decreased $27.4 million between December 31, 2020 and December 31, 2021. Non-performing loans decreased $25.3 million, primarily from $15.8 million of net collections and charge-off activity on three commercial and industrial relationships during the fourth quarter of 2021 and the payoff of one commercial real estate relationship of approximately $15.1 million in the first quarter. Restructured loans at December 31, 2021 decreased by $1.3 million compared to December 31, 2020. The ratio of nonperforming assets to total assets decreased from 0.42% at December 31, 2020 to 0.21% at December 31, 2021.
The following table provides an analysis of the change in the balance of nonperforming assets during the last two years:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2021 | 2020 | |||||
| Beginning balance | $ | 60,508 | $ | 39,808 | |||
| Additions | 45,387 | 45,929 | |||||
| Collections | (47,477) | (16,192) | |||||
| Transfers to accrual | (494) | (134) | |||||
| Charge-offs | (24,791) | (8,903) | |||||
| Ending balance | $ | 33,133 | $ | 60,508 |
The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. 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 utilizes guidelines established by federal regulation.
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RESULTS OF OPERATIONS
2020 compared with 2019
For a discussion of our results for the year ended December 31, 2020 compared to the year ended December 31, 2019, 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, 2020 filed with the SEC on March 1, 2021.
2021 compared with 2020
We recorded net income attributable to WSFS of $271.4 million, or $5.69 per diluted common share, for the year ended December 31, 2021, an increase of $156.7 million compared to $114.8 million, or $2.27 per diluted common share, for the year ended December 31, 2020.
•Net interest income for the year ended December 31, 2021 was $433.6 million, a decrease of $32.3 million compared to 2020, primarily due to lower purchase accounting accretion, the lower interest rate environment and balance sheet mix, as well as the impact of PPP loans. See “Net Interest Income” for further information.
•Our provision for credit losses decreased $270.3 million in 2021, primarily due to positive impacts in the economic forecast included in our CECL modeling and improved credit quality metrics reflecting overall declines in problem assets and delinquencies, partially offset by new loan originations. See “Provision/Allowance for Credit Losses” for further information.
•Noninterest income decreased $15.5 million in 2021, primarily due to the impact from the sale of Visa Class B shares in the prior year, lower securities gains, a decline in our mortgage banking business, and lower interchange fees due to the impact of the Durbin Amendment on 2021 results. These decreases were partially offset by higher revenues from Wealth Management, other income and traditional banking fees, and total net gains on equity investments. See “Noninterest Income” for further information.
•Noninterest expense increased $9.7 million in 2021, primarily reflecting an increase in salaries and benefits due to higher salaries and franchise growth, higher net corporate development and restructuring costs related to our acquisition of Bryn Mawr Trust and higher equipment expense, partially offset by the Charter Oak legal settlement recovery in December 2021, and decreases in loan workout and other credit costs, professional fees, and other operating expenses. 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, | 2021 | 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 | $ | 3,801,816 | $ | 183,782 | 4.84 | % | $ | 4,174,451 | $ | 221,595 | 5.32 | % | ||||||||||
| Commercial mortgage loans | 2,770,241 | 113,979 | 4.11 | 2,827,875 | 125,811 | 4.45 | ||||||||||||||||
| Residential | 636,443 | 42,063 | 6.61 | 910,263 | 53,780 | 5.91 | ||||||||||||||||
| Consumer | 1,134,569 | 49,330 | 4.35 | 1,144,435 | 55,304 | 4.83 | ||||||||||||||||
| Loans held for sale | 118,803 | 4,094 | 3.45 | 106,398 | 3,904 | 3.67 | ||||||||||||||||
| Total loans and leases | 8,461,872 | 393,248 | 4.65 | 9,163,422 | 460,394 | 5.03 | ||||||||||||||||
| Mortgage-backed securities(3) | 3,340,001 | 55,802 | 1.67 | 2,052,672 | 48,377 | 2.36 | ||||||||||||||||
| Investment securities(3) | 321,599 | 5,524 | 1.94 | 219,603 | 4,619 | 2.47 | ||||||||||||||||
| Other interest-earning assets | 1,320,229 | 1,795 | 0.14 | 369,229 | 1,015 | 0.27 | ||||||||||||||||
| Total interest-earning assets | 13,443,701 | 456,369 | 3.40 | 11,804,926 | 514,405 | 4.37 | ||||||||||||||||
| Allowance for credit losses | (161,770) | (177,052) | ||||||||||||||||||||
| Cash and due from banks | 144,778 | 119,337 | ||||||||||||||||||||
| Cash in non-owned ATMs | 454,803 | 347,925 | ||||||||||||||||||||
| Bank owned life insurance | 32,818 | 30,729 | ||||||||||||||||||||
| Other noninterest-earning assets | 989,590 | 1,022,452 | ||||||||||||||||||||
| Total assets | $ | 14,903,920 | $ | 13,148,317 | ||||||||||||||||||
| Liabilities and stockholders’ equity: | ||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||
| Interest-bearing demand | $ | 2,655,887 | $ | 2,262 | 0.09 | % | $ | 2,304,558 | $ | 4,229 | 0.18 | % | ||||||||||
| Money market | 2,740,573 | 3,218 | 0.12 | 2,324,259 | 9,423 | 0.41 | ||||||||||||||||
| Savings | 1,912,568 | 586 | 0.03 | 1,690,240 | 3,518 | 0.21 | ||||||||||||||||
| Customer time deposits | 1,065,137 | 7,332 | 0.69 | 1,247,197 | 18,699 | 1.50 | ||||||||||||||||
| Total interest-bearing customer deposits | 8,374,165 | 13,398 | 0.16 | 7,566,254 | 35,869 | 0.47 | ||||||||||||||||
| Brokered deposits | 70,090 | 1,525 | 2.18 | 246,644 | 3,393 | 1.38 | ||||||||||||||||
| Total interest-bearing deposits | 8,444,255 | 14,923 | 0.18 | 7,812,898 | 39,262 | 0.50 | ||||||||||||||||
| Federal Home Loan Bank advances | 184 | 5 | 2.72 | 88,011 | 1,950 | 2.22 | ||||||||||||||||
| Trust preferred borrowings | 67,011 | 1,274 | 1.90 | 67,011 | 1,751 | 2.61 | ||||||||||||||||
| Senior debt | 192,243 | 6,497 | 3.38 | 108,420 | 4,998 | 4.61 | ||||||||||||||||
| Other borrowed funds(4) | 21,661 | 21 | 0.10 | 53,828 | 489 | 0.91 | ||||||||||||||||
| Total interest-bearing liabilities | 8,725,354 | 22,720 | 0.26 | 8,130,168 | 48,450 | 0.60 | ||||||||||||||||
| Noninterest-bearing demand deposits | 4,008,140 | 2,848,243 | ||||||||||||||||||||
| Other noninterest-bearing liabilities | 323,715 | 335,456 | ||||||||||||||||||||
| Stockholders’ equity of WSFS | 1,848,904 | 1,836,115 | ||||||||||||||||||||
| Noncontrolling interest | (2,193) | (1,665) | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 14,903,920 | $ | 13,148,317 | ||||||||||||||||||
| Excess of interest-earning assets over interest-bearing liabilities | $ | 4,718,347 | $ | 3,674,758 | ||||||||||||||||||
| Net interest and dividend income | $ | 433,649 | $ | 465,955 | ||||||||||||||||||
| Interest rate spread | 3.14 | % | 3.77 | % | ||||||||||||||||||
| Net interest margin | 3.23 | % | 3.96 | % |
(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 decreased $32.3 million, or 7%, to $433.6 million in 2021, from 2020 primarily due to a $20.9 million decrease in purchase accounting accretion, a net decline of $8.2 million due to a full year impact of the lower rate environment and change in balance sheet mix from optimization of excess customer liquidity, and $3.2 million lower PPP income. Net interest margin decreased 73 bps to 3.23% in 2021 from 3.96% in 2020. The decrease was primarily due to a 59 bps net decline from the lower interest rate environment and balance sheet mix and 23 bps from lower purchase accounting accretion, partially offset by 9 bps from the impact of PPP loans.
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, | 2021 vs. 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Volume | Yield/Rate | Net | |||||||
| Interest Income: | ||||||||||
| Loans: | ||||||||||
| Commercial loans and leases(1) | $ | (18,805) | $ | (19,008) | $ | (37,813) | ||||
| Commercial mortgage loans | (2,492) | (9,340) | (11,832) | |||||||
| Residential | (17,551) | 5,834 | (11,717) | |||||||
| Consumer | (477) | (5,497) | (5,974) | |||||||
| Loans held for sale | 435 | (245) | 190 | |||||||
| Mortgage-backed securities | 24,384 | (16,959) | 7,425 | |||||||
| Investment securities(2) | 2,211 | (1,306) | 905 | |||||||
| Other interest-earning assets | 1,466 | (686) | 780 | |||||||
| Unfavorable | (10,829) | (47,207) | (58,036) | |||||||
| Interest expense: | ||||||||||
| Deposits: | ||||||||||
| Interest-bearing demand | 509 | (2,476) | (1,967) | |||||||
| Money market | 1,470 | (7,675) | (6,205) | |||||||
| Savings | 419 | (3,351) | (2,932) | |||||||
| Customer time deposits | (2,419) | (8,948) | (11,367) | |||||||
| Brokered certificates of deposits | (3,212) | 1,344 | (1,868) | |||||||
| FHLB advances | (2,305) | 360 | (1,945) | |||||||
| Trust preferred borrowings | — | (477) | (477) | |||||||
| Senior debt | 3,098 | (1,599) | 1,499 | |||||||
| Other borrowed funds | (188) | (280) | (468) | |||||||
| Favorable | (2,628) | (23,102) | (25,730) | |||||||
| Net change, as reported | $ | (8,201) | $ | (24,105) | $ | (32,306) |
(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, 2021:
| (Dollars in thousands) | Maturing During 2022 | Maturing From 2023 Through 2026 | Maturing From 2027 Through 2031 | Maturing After 2031 | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Collateralized mortgage obligations (CMO) | ||||||||||||||||||
| Amortized cost | $ | 1,507 | $ | 25,483 | $ | 52,301 | $ | 507,539 | $ | 586,830 | ||||||||
| Weighted average yield | 2.00 | % | 2.22 | % | 1.98 | % | 1.59 | % | 1.65 | % | ||||||||
| Fannie Mae (FNMA) mortgage-backed securities (MBS) | ||||||||||||||||||
| Amortized cost | 1,530 | 75,441 | 102,188 | 4,096,148 | 4,275,307 | |||||||||||||
| Weighted average yield | 2.57 | % | 2.28 | % | 1.66 | % | 1.71 | % | 1.71 | % | ||||||||
| Freddie Mac (FHLMC) MBS | ||||||||||||||||||
| Amortized cost | — | — | 25,898 | 113,810 | 139,708 | |||||||||||||
| Weighted average yield | — | % | — | % | 2.11 | % | 2.91 | % | 2.76 | % | ||||||||
| Ginnie Mae (GNMA) MBS | ||||||||||||||||||
| Amortized cost | — | — | 1,034 | 16,422 | 17,456 | |||||||||||||
| Weighted average yield | — | % | — | % | 3.00 | % | 2.49 | % | 2.52 | % | ||||||||
| Government-sponsored enterprises (GSE) | ||||||||||||||||||
| Amortized cost | — | — | 47,454 | 183,127 | 230,581 | |||||||||||||
| Weighted average yield | — | % | — | % | 1.28 | % | 1.29 | % | 1.28 | % | ||||||||
| Total amortized cost | $ | 3,037 | $ | 100,924 | $ | 228,875 | $ | 4,917,046 | $ | 5,249,882 | ||||||||
| Weighted average yield | 2.29 | % | 2.27 | % | 1.71 | % | 1.70 | % | 1.71 | % |
As of December 31, 2021, 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, 2021, we recorded a recovery of credit losses of $117.1 million, a net change of $270.3 million, compared to the provision for credit losses of $153.2 million in 2020. The ACL was $94.5 million at December 31, 2021 compared to $228.8 million at December 31, 2020.
The decrease of the ACL was due to positive impacts in our economic outlook from our ACL modeling and improved credit quality metrics reflecting overall declines in problem assets and delinquencies, offset by new loan originations. The ratio of allowance for credit losses to total loans and leases was 1.19% at December 31, 2021 and 2.51% at December 31, 2020.
The following chart details the changes in the ACL from December 31, 2020 to December 31, 2021:
(1)Other includes changes that can affect future cash flows that impact ACL, such as changes to maturity dates and payment schedules.
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, 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 | % |
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| (Dollars in thousands) | Commercial and Industrial(1) | Owner- occupied Commercial | Commercial Mortgages | Construction | Residential(2) | Consumer(3) | Total | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of December 31, 2020 | |||||||||||||||||||||||||||
| Allowance for credit losses | $ | 150,875 | $ | 9,615 | $ | 31,071 | $ | 12,190 | $ | 6,893 | $ | 18,160 | $ | 228,804 | |||||||||||||
| % of ACL to total ACL | 66 | % | 4 | % | 14 | % | 5 | % | 3 | % | 8 | % | 100 | % | |||||||||||||
| Loan portfolio balance | $ | 2,949,303 | $ | 1,332,727 | $ | 2,086,062 | $ | 716,275 | $ | 774,455 | $ | 1,158,573 | $ | 9,024,739 | |||||||||||||
| % to total loans and leases | 32 | % | 15 | % | 23 | % | 8 | % | 9 | % | 13 | % | 100 | % | |||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||
| Charge-offs | $ | 10,388 | $ | 336 | $ | 104 | $ | — | $ | 229 | $ | 2,464 | $ | 13,521 | |||||||||||||
| Recoveries | 4,255 | 142 | 158 | 36 | 230 | 893 | 5,714 | ||||||||||||||||||||
| Net charge-offs (recoveries) | $ | 6,133 | $ | 194 | $ | (54) | $ | (36) | $ | (1) | $ | 1,571 | $ | 7,807 | |||||||||||||
| Average loan balance | $ | 2,854,798 | $ | 1,319,653 | $ | 2,173,632 | $ | 654,243 | $ | 895,551 | $ | 1,144,435 | $ | 9,042,312 | |||||||||||||
| Ratio of net charge-offs (recoveries) to average gross loans | 0.21 | % | 0.01 | % | NMF | (0.01) | % | NMF | 0.14 | % | 0.09 | % |
(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.
Noninterest Income
Noninterest income decreased $15.5 million to $185.5 million in 2021 from $201.0 million in 2020. This decrease reflects a decrease in Realized (loss) gain on equity investments, net due to the $22.1 million gain on Visa Class B shares that occurred in June 2020, an $8.7 million decrease in Securities gains, net, a $7.0 million decrease in mortgage banking activities due to a decline in volume compared to the historically higher levels in the prior year, and a $5.5 million decrease in Credit/debit card and ATM income primarily as a result of the Durbin Amendment enacted on July 1, 2020. Partially offsetting these decreases were increases of $13.4 million in Wealth Management revenues driven by our institutional trust business, $5.7 million from other income, primarily from Cash Connect® and gains on the sale of SBA loans, $5.1 million from higher traditional banking fees, and $4.4 million of net gains from the sale of our SoFi investment.
Noninterest Expenses
Noninterest expense increased $9.7 million to $378.5 million in 2021 from $368.8 million in 2020. The increase was primarily due to a $19.9 million increase in Salaries, benefits and other compensation as a result of higher salaries and incentive compensation due to franchise growth, an $8.2 million increase in net corporate development and restructuring costs related to our acquisition of Bryn Mawr Trust, and a $5.2 million increase in Equipment expense including higher third-party software expenses related to our ongoing delivery transformation initiatives. These increases were partially offset by the $15.0 million recovery of legal settlement previously mentioned, a $6.2 million decrease in Loan workout and other credit costs due to the release of reserves on our unfunded commitments driven by improved credit metrics and higher loan workout costs in the prior period, a $3.1 million decrease in professional fees, and a $1.9 million decrease in Other operating expense, primarily due to $2.0 million in lower contributions to the WSFS CARES Foundation when compared to the prior year.
Income Taxes
We recorded $86.1 million of income tax expense for the year ended December 31, 2021 compared to $31.6 million for the year ended December 31, 2020. The increase in income tax expense was primarily driven by an increase in income before taxes of $212.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The effective tax rates for the years ended December 31, 2021 and 2020 were 24.1% and 21.8%, respectively. The effective tax rate for year ended December 31, 2021 increased primarily due to higher nondeductible expenses associated with the acquisition of Bryn Mawr Trust which occurred on January 1, 2022. Nondeductible acquisition costs of $3.9 million were recognized during the year ended December 31, 2021, whereas none were incurred in the same period in 2020. In addition, we recognized $1.7 million in tax benefits during the year ended December 31, 2020 related to tax law changes contained in the CARES Act (see "Regulation - Coronavirus Aid, Relief, and Economic Security (CARES) Act"), related to the ability to carry back certain acquired net operating losses to prior years where the statutory tax rate was higher than the current statutory tax rate. Further, the tax benefit related to stock-based compensation activity for the year ended December 31, 2021 increased compared to the prior year. We recorded $0.4 million of income tax benefit during the year ended December 31, 2021 compared to less than $0.1 million of income tax expense for the same period in 2020.
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 retail 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 retail 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 increased $181.1 million, or 160%, in 2021 compared to 2020 due primarily to a $263.2 million decrease in the provision for credit losses due to positive impacts in our economic outlook from our ACL modeling and improved credit quality metrics reflecting overall declines in problem assets and delinquencies, offset by new loan originations. The decrease in the provision for credit losses was partially offset by an increase in external operating expenses of $17.5 million or 6%, to support franchise growth, a decrease in external net interest income of $33.3 million, or 7%, and a decrease of $31.3 million, or 28%, in external noninterest income primarily due to a decrease in the realized/unrealized gains on equity investments including the gain on Visa Class B shares previously mentioned, and a decline in our mortgage business from the prior year.
Cash Connect® Segment
The Cash Connect® segment income before taxes increased to $10.2 million in 2021 from $9.2 million in 2020. During 2021, the Cash Connect® segment focused on expanding smart safe and ATM managed services to increase fee income and margins. This focus on improving margin and growing on balance sheet remote cash capture volume resulted in a full-year 2021 ROA the Cash Connect® segment of 1.68%, a decrease of 29 bps in comparison with full-year 2020. Cash Connect® had $1.7 billion and $1.6 billion in total cash managed at December 31, 2021 and 2020, respectively. At year-end 2021, Cash Connect® serviced approximately 27,400 non-bank ATMs and approximately 6,300 retail smart safes nationwide compared to approximately 27,900 non-bank ATMs and approximately 4,500 smart safes at year-end 2020.
Wealth Management Segment
The Wealth Management segment income before taxes increased $30.7 million in 2021 compared to 2020, reflecting significant growth in our institutional trust activity and AUM growth from equity market performance, and $13.3 million of the overall $15.0 million recovery of legal settlement related to Charter Oak. WSFS Institutional Services® ended 2021 as the securitization industry's fourth most active trustee for U.S. ABS and MBS according to Asset-Backed Alert’s ABS Database, an improvement from sixth most active in the prior year.
Segment financial information for the years ended December 31, 2021, 2020 and 2019 is provided in Note 21 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, 2021 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: | |||||||||||||||||||
| Commercial loans and leases(2) | $ | 2,965,358 | $ | 1,098,580 | $ | 281,560 | $ | 11,259 | $ | 4,356,757 | |||||||||
| Commercial mortgage loans(2) | 1,173,254 | 557,367 | 159,057 | 7,051 | 1,896,729 | ||||||||||||||
| Residential(1)(2) | 182,103 | 265,950 | 111,403 | 7,681 | 567,137 | ||||||||||||||
| Consumer(2) | 575,263 | 369,970 | 199,607 | 4,395 | 1,149,235 | ||||||||||||||
| Loans held for sale(2) | 134,609 | 1,364 | 1,628 | 109 | 137,710 | ||||||||||||||
| Investment securities, available-for-sale | 1,734,964 | 2,742,747 | 1,681,258 | 52,508 | 6,211,477 | ||||||||||||||
| Investment securities, held-to-maturity | 17,267 | 66,800 | 6,579 | — | 90,646 | ||||||||||||||
| Total interest-rate sensitive assets: | $ | 6,782,818 | $ | 5,102,778 | $ | 2,441,092 | $ | 83,003 | $ | 14,409,691 | |||||||||
| Interest-rate sensitive liabilities: | |||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||
| Interest-bearing demand | $ | 1,396,639 | $ | — | $ | — | $ | — | $ | 1,396,639 | |||||||||
| Savings | 1,129,268 | — | — | — | 1,129,268 | ||||||||||||||
| Money market | 2,285,014 | — | — | — | 2,285,014 | ||||||||||||||
| Customer time deposits | 717,678 | 269,525 | 732 | — | 987,935 | ||||||||||||||
| Trust preferred borrowings | 67,011 | — | — | — | 67,011 | ||||||||||||||
| Senior debt | — | 147,939 | — | — | 147,939 | ||||||||||||||
| Other borrowed funds | 37,860 | — | — | — | 37,860 | ||||||||||||||
| Total interest-rate sensitive liabilities: | $ | 5,633,470 | $ | 417,464 | $ | 732 | $ | — | $ | 6,051,666 | |||||||||
| Excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap) | $ | 1,149,348 | $ | 4,685,314 | $ | 2,440,360 | $ | 83,003 | $ | 8,358,025 | |||||||||
| One-year interest-rate sensitive assets/interest-rate sensitive liabilities | 120.40 | % | |||||||||||||||||
| One-year interest-rate sensitive gap as a percent of total assets | 7.28 | % |
(1)Includes reverse mortgage loans
(2)Loan balances exclude nonaccruing loans, deferred fees and costs
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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 17 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 7 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, 2021, the Company believes that its ACL was adequate.
For information on Recent Accounting Pronouncements see Note 2 to the Consolidated Financial Statements.
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