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 Bankor 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 billionin assets and $34.6 billionin assets under management (AUM) and assets under administration (AUA) at December 31, 2021, WSFS Bankis the oldest and largest locally-managed bank and trust company headquartered in the Delawareand Greater Philadelphiaregion. As a federal savings bank that was formerly chartered as a state mutual savings bank, WSFS Bankenjoys a broader scope of permissible activities than most other financial institutions. A fixture in the community, WSFS Bankhas been in operation for more than 189 years. In addition to its focus on stellar customer experiences, WSFS Bankhas 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 Companyof Delaware® (Christiana Trust DE) and WSFS SPE Services, LLC. We also had one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bankhad 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 billionas of December 31, 2021, which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a $6.2 billioncommercial 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 billionin 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 billionof 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 TrustDE, 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. 47 --------------------------------------------------------------------------------
Notable Items Affecting Results of Operations, Financial Condition and Business Outlook
Notable items in 2021 include the following:
• Acquisition of Bryn Mawr Trust
$13.0 millionof corporate development and restructuring expenses during the year ended December 31, 2021primarily related to our merger with Bryn Mawr Bank Corporation(BMBC), a Pennsylvaniacorporation and the parent holding company of The Bryn Mawr Trust Company, a Pennsylvaniachartered bank and wholly owned subsidiary of BMBC. Throughout this document, we refer to these acquired entities collectively as " Bryn Mawr Trust."
• The merger was finalized on
?Total assets of
?Total liabilities of
?Total AUM and AUA of
•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.
June 15, 2021, WSFS completed the redemption of $100.0 millionin aggregate principal amount of our 4.50% fixed-to-floating rate senior notes due 2026 (the 2026 Notes). We recorded a $1.1 millionloss 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 billionof 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 millionduring 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 millionnet gain on the liquidation of our investment in Social Finance, Inc.(SoFi). We used $1.0 millionof the proceeds to make a contribution to the WSFS CARES Foundationto 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. Burroughsjoined 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.
• In 2021, we resolved all outstanding legal issues associated with Nature’s
Total assets increased
$1.5 billion, or 10%, to $15.8 billionas of December 31, 2021, compared to $14.3 billionas 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 billionin 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 milliondecline in commercial and industrial loans that included a $719.7 milliondecrease due to forgiveness of PPP loans and higher loan payoffs, a $227.8 milliondecline in residential loans, largely due to non-relationship run-off portfolios acquired through the Beneficial Bancorp, Inc.(Beneficial) acquisition, and a $204.6 milliondecline in commercial mortgage loans due to higher loan payoffs. Partially offsetting these decreases were $103.4 millionof growth in our commercial small business leases portfolio, and a reduction of $134.3 millionin 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.
• Held-to-maturity marketable securities: Held-to-maturity marketable securities decreased
Total liabilities increased
•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 billionin deposits as of December 31, 2021, an increase of $750.8 millionfrom the prior year. The ratio of net loans and leases (including loans held for sale) to customer deposits was 60% at December 31, 2021reflecting significant liquidity capacity.
• Senior debt: senior debt has decreased
•Other liabilities: Other liabilities increased
$14.4 million, primarily due to $17.7 millionreflecting the timing of settlements for debt security trades, partially offset by a decrease of $5.8 millionin certain retirement plan liabilities. Stockholders' equity increased $147.4 millionto $1.9 billionat December 31, 2021compared to $1.8 billionat December 31, 2020. The increase was primarily due to earnings of $271.4 millionduring the year, partially offset by $93.8 millionin unfavorable market-value changes on available-for-sale securities, $24.2 millionin common stock dividends paid and $13.3 millionrelated 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 ordinary shares as treasury shares at
CASH AND 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. 49
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 InsuranceCorporation 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, 2021common 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 millionin 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 Treasuryfunction 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 millionto $1.5 billionfrom $1.7 billionas 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 billionprimarily due to net purchases of available-for-sale debt securities of $2.8 billionpartially offset by $1.3 billionfrom 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 billionnet increase in deposits, as a result of the increase in customer funding discussed above, partially offset by the redemption of $100.0 millionin aggregate principal amount of the 2026 Notes, liquidity management and common stock dividends of $24.2 million, $13.3 millionfor repurchases of common stock under the previously announced stock repurchase plan, and $6.6 millionfor 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 millionin 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 millionfor our trust preferred borrowings, due June 1, 2035, and $150.0 millionfor 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 millionin 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. 50
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 $ 13,816Owner-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 $ 60,508Past due loans: Commercial $ 1,357 $ 5,634Residential - 25 Consumer(2) 8,634 11,035 Total past due loans $ 9,991
Ratio of allowance for credit losses to total gross loans and leases(3)
1.19 % 2.51 %
Ratio of non-current 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. 51
Nonperforming assets decreased
$27.4 millionbetween December 31, 2020and December 31, 2021. Non-performing loans decreased $25.3 million, primarily from $15.8 millionof 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 millionin the first quarter. Restructured loans at December 31, 2021decreased by $1.3 millioncompared to December 31, 2020. The ratio of nonperforming assets to total assets decreased from 0.42% at December 31, 2020to 0.21% at December 31, 2021.
The following table presents an analysis of the evolution of the balance of non-performing assets over the last two years:
Year Ended December 31, (Dollars in thousands) 2021 2020 Beginning balance
$ 60,508 $ 39,808Additions 45,387 45,929 Collections (47,477) (16,192) Transfers to accrual (494) (134) Charge-offs (24,791) (8,903) Ending balance $ 33,133 $ 60,508The 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. 52
Table of Contents RESULTS OF OPERATIONS 2020 compared with 2019 For a discussion of our results for the year ended
December 31, 2020compared 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, 2020filed with the SECon March 1, 2021. 2021 compared with 2020
We recorded net income attributable to WSFS of
•Net interest income for the year ended
December 31, 2021was $433.6 million, a decrease of $32.3 millioncompared 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 millionin 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 millionin 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 millionin 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 Trustand 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. 53
-------------------------------------------------------------------------------- Table of Contents 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 Average Interest & Yield/ Average Interest &
(Dollars in thousands) Balance Dividends Rate(1) Balance Dividends Rate (1) Assets: Interest-earning assets: Loans:(2) Commercial loans and leases
$ 3,801,816 $ 183,7824.84 % $ 4,174,451 $ 221,5955.32 % 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
Total loans and leases 8,461,872 393,248 4.65 9,163,422 460,394
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
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 $ 13,148,317Liabilities and stockholders' equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 2,655,887 $ 2,2620.09 % $ 2,304,558 $ 4,2290.18 % 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
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
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
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 $ 13,148,317Excess of interest-earning assets over interest-bearing liabilities $ 4,718,347 $ 3,674,758Net interest and dividend income $ 433,649 $ 465,955Interest 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. 54 -------------------------------------------------------------------------------- Table of Contents Net interest income decreased $32.3 million, or 7%, to $433.6 millionin 2021, from 2020 primarily due to a $20.9 milliondecrease in purchase accounting accretion, a net decline of $8.2 milliondue 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 millionlower 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 income adjustment equivalent to tax related to commercial loans. (2)Includes income adjustment equivalent to municipal bond tax.
The following table details the maturity and the weighted average yield of the investment portfolio available for sale at
Maturing During Maturing From 2023 Maturing From 2027 Maturing After (Dollars in thousands) 2022 Through 2026 Through 2031 2031 Total Collateralized mortgage obligations (CMO) Amortized cost
$ 1,507 $ 25,483 $ 52,301 $ 507,539 $ 586,830Weighted 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 $ 5,249,882Weighted 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. 56
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 millionin 2020. The ACL was $94.5 millionat December 31, 2021compared to $228.8 millionat 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, 2021and 2.51% at December 31, 2020.
The following table details the changes in the ACL of
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(1)Other includes changes that may affect future cash flows that have an impact on ACL, such as changes in maturity dates and payment schedules.
The following tables detail the ACL allocation and show our net charges (recoveries) by portfolio category:
Owner- Commercial and occupied Commercial (Dollars in thousands) Industrial(1) Commercial Mortgages Construction Residential(2) Consumer(3) Total As of
December 31, 2021Allowance 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, 2021Charge-offs $ 23,592 $ 83 $ 73 $ 2,473$ - $ 2,094 $ 28,315Recoveries 8,756 160 269 - 789 1,131 11,105 Net charge-offs (recoveries) $ 14,836 $ (77) $ (196) $ 2,473$ (789) $ 963 $ 17,210Average loan balance $ 2,463,933 $ 1,337,883 $ 1,994,995 $ 775,246 $ 628,411 $ 1,134,569 $ 8,335,037Ratio of net charge-offs (recoveries) to average gross loans 0.60 % (0.01) % (0.01) % 0.32 % (0.13) % 0.08 % 0.21 % 57
Table of Contents Owner- Commercial and occupied Commercial (Dollars in thousands) Industrial(1) Commercial Mortgages Construction Residential(2) Consumer(3) Total As of
December 31, 2020Allowance 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, 2020Charge-offs $ 10,388 $ 336 $ 104$ - $ 229 $ 2,464 $ 13,521Recoveries 4,255 142 158 36 230 893 5,714 Net charge-offs (recoveries) $ 6,133 $ 194 $ (54) $ (36)$ (1) $ 1,571 $ 7,807Average loan balance $ 2,854,798 $ 1,319,653 $ 2,173,632 $ 654,243 $ 895,551 $ 1,144,435 $ 9,042,312Ratio 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 decreased
$15.5 millionto $185.5 millionin 2021 from $201.0 millionin 2020. This decrease reflects a decrease in Realized (loss) gain on equity investments, net due to the $22.1 milliongain on Visa Class B shares that occurred in June 2020, an $8.7 milliondecrease in Securities gains, net, a $7.0 milliondecrease in mortgage banking activities due to a decline in volume compared to the historically higher levels in the prior year, and a $5.5 milliondecrease 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 millionin Wealth Management revenues driven by our institutional trust business, $5.7 millionfrom other income, primarily from Cash Connect® and gains on the sale of SBA loans, $5.1 millionfrom higher traditional banking fees, and $4.4 millionof net gains from the sale of our SoFi investment. Noninterest Expenses Noninterest expense increased $9.7 millionto $378.5 millionin 2021 from $368.8 millionin 2020. The increase was primarily due to a $19.9 millionincrease in Salaries, benefits and other compensation as a result of higher salaries and incentive compensation due to franchise growth, an $8.2 millionincrease in net corporate development and restructuring costs related to our acquisition of Bryn Mawr Trust, and a $5.2 millionincrease 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 millionrecovery of legal settlement previously mentioned, a $6.2 milliondecrease 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 milliondecrease in professional fees, and a $1.9 milliondecrease in Other operating expense, primarily due to $2.0 millionin lower contributions to the WSFS CARES Foundationwhen compared to the prior year.
$86.1 millionof income tax expense for the year ended December 31, 2021compared to $31.6 millionfor 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 millionfor the year ended December 31, 2021compared to the year ended December 31, 2020. The effective tax rates for the years ended December 31, 2021and 2020 were 24.1% and 21.8%, respectively. The effective tax rate for year ended December 31, 2021increased primarily due to higher nondeductible expenses associated with the acquisition of Bryn Mawr Trustwhich occurred on January 1, 2022. Nondeductible acquisition costs of $3.9 millionwere recognized during the year ended December 31, 2021, whereas none were incurred in the same period in 2020. In addition, we recognized $1.7 millionin tax benefits during the year ended December 31, 2020related 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, 2021increased compared to the prior year. We recorded $0.4 millionof income tax benefit during the year ended December 31, 2021compared to less than $0.1 millionof 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 taxable income projections and make adjustments to our provision for income taxes accordingly.
For financial reporting purposes, our business has three reporting segments:
WSFS Bank, Cash Connect®, and Wealth Management. The WSFS Banksegment 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.Sthrough 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 banking segment
The WSFS Banksegment income before taxes increased $181.1 million, or 160%, in 2021 compared to 2020 due primarily to a $263.2 milliondecrease 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 millionor 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 millionin 2021 from $9.2 millionin 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 billionand $1.6 billionin total cash managed at December 31, 2021and 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 millionin 2021 compared to 2020, reflecting significant growth in our institutional trust activity and AUM growth from equity market performance, and $13.3 millionof the overall $15.0 millionrecovery 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
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, 2021are shown in the following table: Less than One to Five Five to Fifteen Over Fifteen (Dollars in thousands) One Year Years Years Years Total Interest-rate sensitive assets: Loans: Commercial loans and leases(2) $ 2,965,358 $ 1,098,580 $ 281,560 $ 11,259 $ 4,356,757Commercial 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 $ 14,409,691Interest-rate sensitive liabilities: Interest-bearing deposits: Interest-bearing demand $ 1,396,639$ - $ - $ - $ 1,396,639Savings 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$ - $ 6,051,666Excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap) $ 1,149,348 $ 4,685,314 $ 2,440,360 $ 83,003 $ 8,358,025One-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 60
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. 61 --------------------------------------------------------------------------------
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.
Provision 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 more information on recent accounting pronouncements, see note 2 to the consolidated financial statements.
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