# WSFS FINANCIAL CORP (WSFS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WSFS FINANCIAL CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/828944/000162828024007987/wsfs-20231231.htm
Accession: 0001628280-24-007987
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WSFS/
All MD&A years: /company/WSFS/mda/
Previous year: /company/WSFS/mda/fy2022/ (FY 2022)
Next year: /company/WSFS/mda/fy2024/ (FY 2024)

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 $20.6 billion in assets and $84.3 billion in assets under management (AUM) and assets under administration (AUA) at December 31, 2023, 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 191 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, 2023, we had six consolidated subsidiaries: WSFS Bank, The Bryn Mawr Trust Company of Delaware (BMT-DE), Bryn Mawr Capital Management, LLC (BMCM), WSFS Wealth Management, LLC (Powdermill®), WSFS SPE Services, LLC, 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, 2023, WSFS completed the merger and brand conversion of WSFS Capital Management, LLC (West Capital) and Cypress Capital Management, LLC and renamed the combined entity Bryn Mawr Capital Management, LLC. BMCM is registered as an investment advisor with the U.S. Securities and Exchange Commission and is a wholly-owned subsidiary of WSFS. In the third quarter of 2023, BMCM expanded its business in Southern Delaware and established a new presence in Boca Raton, Florida with the acquisition of a registered investment advisory firm's business based in Rehoboth Beach, Delaware.

Our banking business had a total loan and lease portfolio of $12.8 billion as of December 31, 2023, which was funded primarily through commercial relationships and consumer and customer generated deposits. We have built a $9.9 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 $1.9 billion in total cash and services approximately 33,000 non-bank ATMs and 8,700 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 and deposit safe cash logistics. Cash Connect® also supports 590 owned or 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. Combined, these businesses had $84.3 billion of AUM and AUA at December 31, 2023.

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. 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 a percentage fee based on account assets, 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.

BMT-DE 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.

As of December 31, 2023, we service our customers primarily from our 114 offices located in Pennsylvania (57), Delaware (40), New Jersey (14), Florida (1), Nevada (1) and Virginia (1), our ATM network, our website at www.wsfsbank.com, and our mobile app.

Notable Items Impacting Results of Operations, Financial Condition and Business Outlook

Notable items in 2023 include the following:

•WSFS completed the redemption of the $30.0 million of fixed-to-floating rate subordinated notes due 2025 (the 2025 Notes) acquired from Bryn Mawr Trust. The 2025 Notes were redeemed at a price of 100%, plus accrued and unpaid interest through the date of redemption.

•There was an increase in the allowance for credit losses (ACL) of $34.3 million during the year ended December 31, 2023, primarily due to net loan growth across the CRE, Consumer and commercial small business leasing portfolios as well as higher provisions on our CRE, commercial small business leasing, and Upstart portfolios and the elder care portfolio within C&I. See “Results of Operations - Provision/Allowance for Credit Losses (ACL)” for further information.

•We realized a $9.5 million gain on our equity investment in Spring EQ, a digital home equity origination platform, which was sold during the fourth quarter.

•Recorded an income tax charge of $7.1 million from our decision to surrender $65.5 million of previously acquired BOLI policies. This resulted from recent changes in the interest rate environment lowering our yields on these long-term assets and the termination of a stable value protection wrap policy. We expect to deploy the net proceeds from the surrender into higher yielding interest-earning assets or payoff wholesale funding.

•Recorded a $5.1 million expense for the FDIC Special Assessment charged to recover losses to the Deposit Insurance Fund related to the closures of certain banks in 2023.

•We contributed $4.9 million to the WSFS CARES Foundation to enhance community support activities, which included a one-time $2.0 million special contribution in the fourth quarter.

•During 2023, WSFS repurchased 1,247,178 shares of common stock under the Company's share repurchase program at an average price of $41.52 per share, for an aggregate purchase price of $51.8 million and paid dividends on our common stock of $36.7 million, returning total capital to shareholders of $88.5 million.

•The Bank and the Company continue to be well above well-capitalized across all measures of regulatory capital, with total common equity tier 1 capital of 13.72% and 13.17%, respectively, and total risk-based capital of 14.96% and 15.23%, respectively.

•BMCM expanded into southern Delaware and established a new presence in Boca Raton, Florida, after an acquisition of a woman-founded, owned and managed registered investment advisory firm based in Rehoboth Beach, Delaware.

•In June, we held our first-ever "We Stand for Service Day", during which approximately 1,200 of our Associates provided nearly 5,000 hours of service to more than 80 nonprofit and community organizations across the Greater Philadelphia, Southern New Jersey and Delaware region.

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FINANCIAL CONDITION

Total assets increased $0.7 billion, or 3%, to $20.6 billion as of December 31, 2023, compared to $19.9 billion as of December 31, 2022. These increases are primarily comprised of the following (in descending order of magnitude):

•Net loans and leases, excluding loans held for sale, increased $823.2 million, primarily driven by growth of $450.1 million in commercial mortgages, $201.2 million in consumer loans driven by our consumer partnerships and $108.8 million in residential.

•Total cash and cash equivalents increased $255.6 million, primarily due to increased deposits.

•Total investment securities decreased $299.6 million:

◦Investment securities, available-for-sale decreased $246.5 million, primarily due to repayments of $354.8 million, partially offset by increased market values on available-for-sale securities of $83.7 million and $27.7 million in purchases.

•Bank-owned life insurance decreased $59.2 million primarily due to our decision to surrender certain previously-acquired BOLI policies in 2023.

Total liabilities increased $0.4 billion, or 2%, to $18.1 billion at December 31, 2023 compared to the prior year, primarily comprised of the following (in descending order of magnitude):

•Other borrowed funds increased $547.8 million primarily due to $565.0 million borrowed from the Bank Term Funding Program (BTFP) as a result of favorable terms and pricing.

•Total deposits increased $270.5 million, primarily driven by a $236.6 million increase in trust deposits.

•FHLB advances decreased $350.0 million due to the repayment of fixed rate FHLB term advances as part of our routine balance sheet management.

•Other liabilities decreased $68.2 million primarily due to a net decrease of $65.3 million in collateral held on derivatives and derivative liabilities driven by changes in interest rates.

•Senior and subordinated debt decreased $29.8 million due to the redemption of the 2025 Notes.

Stockholders’ equity increased $272.5 million to $2.5 billion at December 31, 2023 compared to the prior year. The increase was primarily due to earnings of $269.2 million during the year and a decrease of $81.9 million in accumulated other comprehensive loss from market value increases on investment securities, partially offset by significant levels of capital return to shareholders including $54.6 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 $36.7 million.

We repurchased 1,247,178 and 4,151,117 shares of our common stock in 2023 and 2022, respectively. We held 15,557,263 shares and 14,310,085 shares of our common stock as treasury shares at December 31, 2023 and 2022, respectively.

For further information on our regulatory capital requirements, refer to our Capital Resources discussion below.

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. 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, 2023, 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, 2023 common equity Tier 1 capital ratio of 13.72%, Tier 1 capital ratio of 13.72%, total risk based capital ratio of 14.96% and Tier 1 leverage capital ratio of 10.92%, 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 $197.3 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, BTFP borrowings, 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, 2023, the Company has $1.1 billion in cash, cash equivalents, and restricted cash. Our estimated uninsured deposits were $6.3 billion, or 38% of total customer deposits, and our estimated unprotected deposits (uninsured and uncollateralized) were $4.8 billion, or 29% of total customer deposits.

As of December 31, 2023, the Company had a readily available, secured borrowing capacity of $5.4 billion from the FHLB, $0.6 billion through the Federal Reserve Discount Window, and $1.7 billion through the BTFP. In addition, the Company had $1.5 billion in unpledged securities that could be used to support additional borrowings and $0.5 billion of cash deposited with the Federal Reserve Bank. The Company’s readily available, secured borrowing capacity to estimated unprotected deposits ratio is 202%.

During the year ended December 31, 2023, cash, cash equivalents and restricted cash increased $0.3 billion to $1.1 billion from $0.8 billion as of December 31, 2022. Cash provided by operating activities was $237.0 million, primarily reflecting the cash impact of earnings. Cash used for investing activities was $326.3 million primarily due to a $486.8 million net increase in loans and leases and purchases of loans held for investment of $313.4 million. These outflows were partially offset by net repayments of available-for-sale and held-to-maturity debt securities of $327.1 million and $73.0 million, respectively. Cash provided by financing activities was $344.9 million, primarily due to the borrowing of $565.0 million from the BTFP and a $252.5 million net increase in deposits, partially offset by $350.0 million for the repayment of fixed rate FHLB term advances, $54.6 million for repurchases of common stock under the previously announced stock repurchase plan, common stock dividends of $36.7 million, and the $30.0 million redemption of the 2025 Notes

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Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At December 31, 2023, we had $211.3 million in total contractual payments for ongoing leases that have remaining lease terms of less than one year to 22 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, 2023, we had obligations for principal payments on long-term debt including $67.0 million for our trust preferred borrowings, due June 1, 2035, $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027, and $150.0 million for our senior debt, due December 15, 2030. Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the RBC Trusts), which were acquired from Bryn Mawr Bank Corporation, were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although WSFS owns an aggregate of $0.8 million of the common securities of Trust I and Trust II, the RBC Trusts are not consolidated into the Company’s Consolidated Financial Statements as the Company is not deemed to be the primary beneficiary of these entities. Inclusive of the fair value marks, WSFS assumed junior subordinated debentures owed to the RBC Trusts with a carrying value of $11.8 million each, totaling $23.6 million. The Company records its investments in the RBC Trusts’ common securities of $0.4 million 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 RBC 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.

We are also contractually obligated to make interest payments on our long-term debt through their respective maturities. For additional information regarding long-term debt, see Note 12 to the Consolidated Financial Statements. At December 31, 2023, the Company had total commitments to extend credit of $4.1 billion, which are generally one year commitments. For additional information regarding commitments to extend credit, see Note 17 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:

[[GREPCENT_TABLE]]
[["","At December 31,"],["(Dollars in thousands)","2023","","2022"],["Nonaccruing loans:"],["Commercial and industrial","$","29,389","","","$","6,770"],["Owner-occupied commercial","4,862","","","386"],["Commercial mortgages","22,292","","","5,159"],["Construction","12,617","","","5,143"],["Residential","2,579","","","3,199"],["Consumer","2,446","","","2,145"],["Total nonaccruing loans(1)","74,185","","","22,802"],["Other real estate owned","1,569","","","833"],["Restructured loans(2)","\u2014","","","19,737"],["Total nonperforming assets","$","75,754","","","$","43,372"],["Past due loans:"],["Commercial","$","1,552","","","$","1,022"],["Consumer(3)","10,032","","","15,513"],["Total past due loans","$","11,584","","","$","16,535"],["Troubled loans(4)(5):"],["Commercial","$","85,330","","","$","\u2014"],["Residential","777","","","\u2014"],["Consumer","9,161","","","\u2014"],["Total troubled loans","$","95,268","","","$","\u2014"],["Ratio of allowance for credit losses to total gross loans and leases(6)","1.35","%","","1.17","%"],["Ratio of nonaccruing loans to total gross loans and leases(7)","0.58","","","0.19"],["Ratio of nonperforming assets to total assets","0.37","","","0.22"],["Ratio of allowance for credit losses to nonaccruing loans","251","","","666"],["Ratio of allowance for credit losses to total nonperforming assets(8)","246","","","350"]]
[[/GREPCENT_TABLE]]

(1)Includes nonaccrual loans held-for-sale.

(2)Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans.

(3)Includes delinquent, but still accruing, U.S. government guaranteed student loans with little risk of credit loss.

(4)Loans with certain modifications (as prescribed in ASU No. 2022-02) to borrowers experiencing financial difficulty.

(5)Includes troubled loan held-for-sale.

(6)Represents amortized cost basis for loans, leases and held-to-maturity securities.

(7)Total loans exclude loans held-for-sale and reverse mortgages.

(8)Excludes acquired PCD loans.

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Nonperforming assets increased $32.4 million between December 31, 2022 and December 31, 2023. This increase was primarily due to the transfer in of seven commercial relationships totaling $61.1 million and two CRE relationships totaling $19.4 million during the period. These inflows were partially offset by partial charge-offs on some of the C&I relationships totaling $20.7 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 0.22% at December 31, 2022 to 0.37% at December 31, 2023.

The following table summarizes the changes in nonperforming assets during the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(Dollars in thousands)","","2023","","2022"],["Beginning balance","","$","43,372","","","$","33,133"],["Additions","","110,586","","","34,041"],["Collections","","(19,874)","","","(17,293)"],["Transfers to accrual(1)","","(20,263)","","","(922)"],["Charge-offs","","(38,067)","","","(5,587)"],["Ending balance","","$","75,754","","","$","43,372"]]
[[/GREPCENT_TABLE]]

(1)Includes impact of ASU No. 2022-02 adoption.

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

2022 compared with 2021

For a discussion of our results for the year ended December 31, 2022 compared to the year ended December 31, 2021, 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, 2022 filed with the SEC on February 28, 2023.

2023 compared with 2022

We recorded net income attributable to WSFS of $269.2 million, or $4.40 per diluted common share, for the year ended December 31, 2023, a increase of $46.8 million compared to $222.4 million, or $3.49 per diluted common share, for the year ended December 31, 2022.

•Net interest income for the year ended December 31, 2023 was $725.1 million, an increase of $62.2 million compared to 2022, primarily due to the the benefits of our asset-sensitive balance sheet and an increase from the balance sheet size and mix. The increase was partially offset by lower purchase accounting accretion. See “Net Interest Income” for further information.

•Our provision for credit losses increased $40.0 million in 2023, primarily due to higher provisions on our CRE, commercial small business leasing, and Upstart portfolios as well as our elder care portfolio within C&I. See “Provision/Allowance for Credit Losses” for further information.

•Noninterest income increased $29.7 million in 2023, primarily due to increases in income from Cash Connect®, Wealth Management fee income, a realized gain from our investment in Spring EQ, and capital markets income. These increases were partially offset by decreases in other banking fees and mortgage banking activities, and unrealized gains on equity investments and income from BMTIA (business sold in 2022). See “Noninterest Income” for further information.

•Noninterest expense decreased $12.7 million in 2023, primarily due to net corporate development and restructuring costs incurred in 2022, partially offset by increases in other operating expenses driven by Cash Connect®, FDIC expenses, salaries and benefits costs, and professional fees. 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:

[[GREPCENT_TABLE]]
[["Year Ended December 31,","","2023","","2022"],["(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","","$","5,041,280","","","$","346,389","","","6.88","%","","$","4,875,265","","","$","253,293","","","5.21","%"],["Commercial mortgage loans","","4,570,839","","","317,603","","","6.95","","","4,281,768","","","203,611","","","4.76"],["Residential","","820,600","","","38,886","","","4.74","","","790,650","","","35,420","","","4.48"],["Consumer","","1,922,827","","","138,510","","","7.20","","","1,543,704","","","86,743","","","5.62"],["Loans held for sale","","47,424","","","3,883","","","8.19","","","65,927","","","3,687","","","5.59"],["Total loans and leases","","12,402,970","","","845,271","","","6.82","","","11,557,314","","","582,754","","","5.05"],["Mortgage-backed securities(3)","","4,640,646","","","107,555","","","2.32","","","5,151,469","","","106,606","","","2.07"],["Investment securities(3)","","367,026","","","8,783","","","2.71","","","338,979","","","6,899","","","2.39"],["Other interest-earning assets","","282,462","","","14,913","","","5.28","","","878,097","","","7,556","","","0.86"],["Total interest-earning assets","","17,693,104","","","976,522","","","5.53","","","17,925,859","","","703,815","","","3.94"],["Allowance for credit losses","","(169,140)","","","","","","","(140,916)"],["Cash and due from banks","","256,984","","","","","","","243,579"],["Cash in non-owned ATMs","","392,007","","","","","","","551,108"],["Bank owned life insurance","","98,935","","","","","","","100,725"],["Other noninterest-earning assets","","1,931,147","","","","","","","1,783,340"],["Total assets","","$","20,203,037","","","","","","","$","20,463,695"],["Liabilities and stockholders\u2019 equity:"],["Interest-bearing liabilities:"],["Interest-bearing deposits:"],["Interest-bearing demand","","$","3,019,050","","","$","26,671","","","0.88","%","","$","3,377,321","","","$","7,441","","","0.22","%"],["Money market","","4,317,810","","","122,168","","","2.83","","","3,918,756","","","13,536","","","0.35"],["Savings","","1,832,601","","","5,733","","","0.31","","","2,265,721","","","965","","","0.04"],["Customer time deposits","","1,571,682","","","45,184","","","2.87","","","1,103,336","","","5,626","","","0.51"],["Total interest-bearing customer deposits","","10,741,143","","","199,756","","","1.86","","","10,665,134","","","27,568","","","0.26"],["Brokered deposits","","214,608","","","10,064","","","4.69","","","36,461","","","613","","","1.68"],["Total interest-bearing deposits","","10,955,751","","","209,820","","","1.92","","","10,701,595","","","28,181","","","0.26"],["Federal Home Loan Bank advances","","103,268","","","5,348","","","5.18","","","12,841","","","538","","","4.19"],["Trust preferred borrowings","","90,534","","","6,736","","","7.44","","","90,337","","","3,482","","","3.85"],["Senior and subordinated debt","","221,975","","","9,815","","","4.42","","","248,389","","","8,246","","","3.32"],["Other borrowed funds(4)","","442,197","","","19,700","","","4.46","","","47,076","","","478","","","1.02"],["Total interest-bearing liabilities","","11,813,725","","","251,419","","","2.13","","","11,100,238","","","40,925","","","0.37"],["Noninterest-bearing demand deposits","","5,306,511","","","","","","","6,376,459"],["Other noninterest-bearing liabilities","","787,573","","","","","","","590,814"],["Stockholders\u2019 equity of WSFS","","2,300,467","","","","","","","2,398,871"],["Noncontrolling interest","","(5,239)","","","","","","","(2,687)"],["Total liabilities and stockholders\u2019 equity","","$","20,203,037","","","","","","","$","20,463,695"],["Excess of interest-earning assets over interest-bearing liabilities","","$","5,879,379","","","","","","","$","6,825,621"],["Net interest and dividend income","","","","$","725,103","","","","","","","$","662,890"],["Interest rate spread","","","","","","3.40","%","","","","","","3.57","%"],["Net interest margin","","","","","","4.11","%","","","","","","3.71","%"]]
[[/GREPCENT_TABLE]]

(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 $62.2 million, or 9%, to $725.1 million in 2023, compared to 2022 primarily due to a $60.6 million increase from the benefits of our asset-sensitive balance sheet and a $4.0 million increase from the balance sheet size and mix, offset by a $2.4 million decrease in purchase accounting accretion. Net interest margin increased 40 bps to 4.11% in 2023 from 3.71% in 2022. The increase was primarily due to 24 bps increase from the balance sheet size and mix and 17 bps from the benefits of our asset-sensitive balance sheet, partially offset by 1 bp from lower purchase accounting accretion.

The following table provides certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change (the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume.

[[GREPCENT_TABLE]]
[["Year Ended December 31,","2023 vs. 2022"],["(Dollars in thousands)","Volume","","Yield/Rate","","Net"],["Interest Income:"],["Loans:"],["Commercial loans and leases(1)","$","8,940","","","$","84,156","","","$","93,096"],["Commercial mortgage loans","14,587","","","99,405","","","113,992"],["Residential","1,369","","","2,097","","","3,466"],["Consumer","24,137","","","27,630","","","51,767"],["Loans held for sale","(1,216)","","","1,412","","","196"],["Mortgage-backed securities","(11,185)","","","12,134","","","949"],["Investment securities(2)","719","","","1,165","","","1,884"],["Other interest-earning assets","(8,192)","","","15,549","","","7,357"],["Favorable","29,159","","","243,548","","","272,707"],["Interest expense:"],["Deposits:"],["Interest-bearing demand","(866)","","","20,096","","","19,230"],["Money market","1,539","","","107,093","","","108,632"],["Savings","(205)","","","4,973","","","4,768"],["Customer time deposits","3,324","","","36,234","","","39,558"],["Brokered certificates of deposits","6,916","","","2,535","","","9,451"],["FHLB advances","4,654","","","156","","","4,810"],["Trust preferred borrowings","8","","","3,246","","","3,254"],["Senior and subordinated debt","(946)","","","2,515","","","1,569"],["Other borrowed funds","13,713","","","5,509","","","19,222"],["Unfavorable","28,137","","","182,357","","","210,494"],["Net change, as reported","$","1,022","","","$","61,191","","","$","62,213"]]
[[/GREPCENT_TABLE]]

(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, 2023:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Maturing During 2024","","Maturing From 2025 Through 2028","","Maturing From 2029 Through 2033","","Maturing After 2033","","Total"],["Collateralized mortgage obligations (CMO)"],["Amortized cost","$","\u2014","","","$","25,645","","","$","65,192","","","$","470,115","","","$","560,952"],["Weighted average yield","\u2014","%","","2.37","%","","1.97","%","","1.84","%","","1.88","%"],["Fannie Mae (FNMA) mortgage-backed securities (MBS)"],["Amortized cost","$","\u2014","","","$","60,147","","","$","230,640","","","$","3,253,975","","","$","3,544,762"],["Weighted average yield","\u2014","%","","2.38","%","","2.05","%","","1.99","%","","2.00","%"],["Freddie Mac (FHLMC) MBS"],["Amortized cost","$","\u2014","","","$","431","","","$","51,704","","","$","74,721","","","$","126,856"],["Weighted average yield","\u2014","%","","2.43","%","","2.39","%","","3.15","%","","2.84","%"],["Ginnie Mae (GNMA) MBS"],["Amortized cost","$","\u2014","","","$","1","","","$","558","","","$","45,774","","","$","46,333"],["Weighted average yield","\u2014","%","","4.79","%","","2.98","%","","3.39","%","","3.38","%"],["Government-sponsored enterprises (GSE)"],["Amortized cost","$","\u2014","","","$","\u2014","","","$","221,861","","","$","3,578","","","$","225,439"],["Weighted average yield","\u2014","%","","\u2014","%","","1.30","%","","1.44","%","","1.30","%"],["Total amortized cost","$","\u2014","","","$","86,224","","","$","569,955","","","$","3,848,163","","","$","4,504,342"],["Weighted average yield","\u2014","%","","2.38","%","","1.78","%","","2.01","%","","1.99","%"]]
[[/GREPCENT_TABLE]]

As of December 31, 2023, 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, 2023, we recorded a provision for credit losses of $88.1 million, a net change of $40.0 million, compared to the provision of credit losses of $48.1 million in 2022. The increase was primarily due to higher provisions on our CRE, commercial small business leasing, and Upstart portfolios as well as our elder care portfolio within C&I.

The ACL was $186.1 million at December 31, 2023 compared to $151.9 million at December 31, 2022. The increase of the ACL was primarily due to net loan growth across the CRE, Consumer, and commercial small business leasing portfolios and the higher provisions noted above. The ratio of allowance for credit losses to total loans and leases was 1.35% at December 31, 2023 and 1.17% at December 31, 2022.

Net charge-offs were $53.8 million for the year ended December 31, 2023 compared to $16.8 million for the year-ended December 31, 2022. The increase in net charge-offs was primarily driven by our Upstart and commercial small business leasing portfolios.

The following tables detail the allocation of the ACL and show our net charge-offs (recoveries) by portfolio category:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Commercial and Industrial(1)","","Owner- occupied Commercial","","Commercial Mortgages","","Construction","","Residential(2)","","Consumer(3)","","Total"],["As of December 31, 2023"],["Allowance for credit losses","","$","64,564","","","$","10,719","","","$","36,055","","","$","10,762","","","$","5,483","","","$","58,543","","","$","186,126"],["% of ACL to total ACL","","35","%","","6","%","","19","%","","6","%","","3","%","","31","%","","100","%"],["Loan portfolio balance","","$","3,163,692","","","$","1,886,087","","","$","3,801,180","","","$","1,035,530","","","$","867,895","","","$","2,012,134","","","$","12,766,518"],["% to total loans and leases","","24","%","","15","%","","30","%","","8","%","","7","%","","16","%","","100","%"],["Year ended December 31, 2023"],["Charge-offs","","$","42,294","","","$","184","","","$","300","","","$","794","","","$","41","","","$","22,394","","","$","66,007"],["Recoveries","","9,721","","","54","","","7","","","532","","","260","","","1,625","","","12,199"],["Net charge-offs (recoveries)","","$","32,573","","","$","130","","","$","293","","","$","262","","","$","(219)","","","$","20,769","","","$","53,808"],["Average loan balance","","$","3,177,739","","","$","1,863,542","","","$","3,562,070","","","$","1,008,768","","","$","817,758","","","$","1,922,828","","","$","12,352,704"],["Ratio of net charge-offs (recoveries) to average gross loans","","1.03","%","","0.01","%","","0.01","%","","0.03","%","","(0.03)","%","","1.08","%","","0.44","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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","","","$","581","","","$","\u2014","","","$","186","","","$","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","%"]]
[[/GREPCENT_TABLE]]

(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 $29.7 million to $289.9 million in 2023 from $260.1 million in 2022. This increase reflects a $26.9 million increase from Cash Connect® driven by the rising rate environment and continued growth in the smart safe space, $10.2 million increase in Wealth Management revenue, a $9.5 million gain realized from our investment in Spring EQ, and $4.0 million in capital markets income. The increase was partially offset by a $10.6 million decrease in other banking fees, including fees associated with our consumer lending partnerships, gain on sale of SBA loans and traditional bank service fees, and a $2.5 million decrease in mortgage banking activities. In addition to these decreases, we recognized $6.0 million of unrealized gains on equity investments and $2.6 million from BMTIA in 2022. Our diverse fee-based businesses support sustainability of noninterest income through economic cycles.

Noninterest Expenses

Noninterest expense decreased $12.7 million to $561.6 million in 2023 from $574.3 million in 2022. The decrease was primarily due to $61.5 million lower net corporate development and restructuring costs, partially offset by increases of $29.5 million in other operating expense driven by higher variable operating costs from Cash Connect®, $9.8 million in FDIC expenses which includes the $5.1 million FDIC special assessment charged to recover losses to the Deposit Insurance Fund related to closures of certain banks in 2023, $5.3 million in salaries and benefits costs, and $2.7 million in professional fees.

Income Taxes

We recorded $96.2 million of income tax expense for the year ended December 31, 2023 compared to $78.0 million for the year ended December 31, 2022. The increase in income tax expense was primarily driven by an increase in income before taxes of $64.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The effective tax rates for the years ended December 31, 2023 and 2022 were 26.3% and 25.9%, respectively. The effective tax rate for year ended December 31, 2023 increased primarily due to our decision to surrender certain BOLI policies in 2023 that resulted in $7.1 million of tax expense. 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 2023 decreased compared to 2022. There were no nondeductible acquisition costs during the year ended December 31, 2023 compared to $1.8 million incurred in 2022.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing/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 increased $38.9 million, or 18%, in 2023 compared to 2022 primarily due to an $80.0 million increase in net external customer interest income due to the rising interest rate environment and a decrease in external operating expenses of $40.3 million, primarily driven by lower corporate development and restructuring costs, or 9%, partially offset by increases in inter-segment interest expense of $52.2 million and provision for credit losses of $39.6 million.

Cash Connect® Segment

The Cash Connect® segment income before taxes decreased to $4.2 million in 2023 from $7.3 million in 2022. During 2023, 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 2023 ROA for the Cash Connect® segment of 0.80%, a decrease of 21bps in comparison with full-year 2022. Cash Connect® had $1.9 billion in total cash managed at December 31, 2023 and $1.7 billion at December 31, 2022. At year-end 2023, Cash Connect® serviced approximately 33,000 non-bank ATMs compared to approximately 26,300 at year-end 2022 as a result of a large industry participant exiting their ATM cash vault business and approximately 8,700 smart safes nationwide compared to approximately 7,500 smart safes at year-end 2022.

Wealth Management Segment

The Wealth Management segment income before taxes increased $28.9 million in 2023 compared to 2022, primarily attributable to growth in our institutional trust activity. At December 31, 2023, Wealth Management had AUA/AUM of $84.3 billion, a 31% increase from 2022 balances. WSFS Institutional Services® ended 2023 as the securitization industry's fourth most active trustee by number of deals for U.S. ABS and MBS according to Asset-Backed Alert’s ABS Database.

Segment financial information for the years ended December 31, 2023, 2022 and 2021 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, 2023 are shown in the following table:

[[GREPCENT_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","","$","4,270,467","","","$","1,560,156","","","$","360,958","","","$","10,148","","","$","6,201,729"],["Commercial mortgage loans","","2,637,128","","","953,519","","","216,446","","","5,096","","","3,812,189"],["Residential(2)","","127,836","","","301,046","","","357,615","","","93,426","","","879,923"],["Consumer","","944,286","","","776,008","","","235,189","","","33,589","","","1,989,072"],["Loans held for sale","","26,193","","","5,283","","","4,010","","","\u2014","","","35,486"],["Investment securities, available-for-sale","","810,582","","","1,288,020","","","2,306,782","","","566,486","","","4,971,870"],["Investment securities, held-to-maturity","","62,200","","","241,817","","","561,770","","","313,207","","","1,178,994"],["Other interest-earning assets","","15,398","","","\u2014","","","\u2014","","","\u2014","","","15,398"],["Total interest-rate sensitive assets:","","$","8,894,090","","","$","5,125,849","","","$","4,042,770","","","$","1,021,952","","","$","19,084,661"],["Interest-rate sensitive liabilities:"],["Interest-bearing deposits:"],["Interest-bearing demand","","$","1,467,765","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","1,467,765"],["Savings","","882,060","","","\u2014","","","\u2014","","","\u2014","","","882,060"],["Money market","","4,088,226","","","\u2014","","","\u2014","","","\u2014","","","4,088,226"],["Customer time deposits","","1,695,594","","","86,290","","","1,583","","","\u2014","","","1,783,467"],["Trust preferred borrowings","","90,638","","","\u2014","","","\u2014","","","\u2014","","","90,638"],["Senior and subordinated debt","","70,000","","","148,400","","","\u2014","","","\u2014","","","218,400"],["Other borrowed funds","","629,216","","","\u2014","","","\u2014","","","8,498","","","637,714"],["Total interest-rate sensitive liabilities:","","$","8,923,499","","","$","234,690","","","$","1,583","","","$","8,498","","","$","9,168,270"],["(Shortfall) excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap)","","$","(29,409)","","","$","4,891,159","","","$","4,041,187","","","$","1,013,454","","","$","9,916,391"],["One-year interest-rate sensitive assets/interest-rate sensitive liabilities","","99.67","%"],["One-year interest-rate sensitive gap as a percent of total assets","","(0.14)","%"]]
[[/GREPCENT_TABLE]]

(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 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 ACL 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 Company’s control, may frequently update and have a material impact to our financial results.

Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on our financial assets, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACL because a wide variety of factors and inputs are considered in these estimates and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across the Company’s portfolio mix and segmentation. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As of December 31, 2023, the Company believes that its ACL was adequate.

For information on Recent Accounting Pronouncements see Note 2 to the Consolidated Financial Statements.

63