UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20192020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35638
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WSFS FINANCIAL CORPORATION | | | | | | |
(Exact name of registrant as specified in its charter) | | | | | | |
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Delaware | | | | | 22-2866913 | |
(State or other jurisdiction of Incorporation or organization) | | | | | (I.R.S. Employer Identification Number) | |
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500 Delaware Ave,
Wilmington, Delaware, 19801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (302) 792-6000
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | WSFS | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | x | | Accelerated filer | ☐ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | ☐ |
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Emerging growth company | | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Number of shares outstanding of the issuer's common stock, as of the latest practicable date: 52,148,73450,660,203 shares as of November 1, 2019.July 31, 2020.
WSFS FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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| PART I. Financial Information | Page |
Item 1. | Financial Statements (Unaudited) | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
PART II. Other Information | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and exhibits thereto,hereto, contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:
•those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the markets in which the Company operates and in which its loans are concentrated, including the effects ofpossible declines in housing markets, an increase in unemployment levels and slowdowns in economic growth;growth, including as a result of the novel coronavirus, or COVID-19, pandemic;
•possible additional loan losses and impairment of the collectability of loans, particularly as a result of the COVID-19 pandemic and the policies and programs implemented by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, including its automatic loan forbearance provisions and our Paycheck Protection Program (PPP) lending activities;
•the economic and financial impact of federal, state and local emergency orders and other actions taken in response to the COVID-19 pandemic;
•the Company’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs;
•possible additional loan lossescosts and impairment in the collectability of loans;complying with government-imposed foreclosure moratoriums;
•changes in market interest rates, which may increase funding costs and reduce earning asset yields and thus reduce margin;
•the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio;
•the credit risk associated with the substantial amount of commercial real estate, construction and land development and commercial and industrial loans in ourthe Company's loan portfolio;
•the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Economic Growth, Regulatory Relief and Consumer Protection Act (which amended the Dodd-Frank Act) (the Economic Growth Act) and the rules and regulations issued in accordance therewith and potential expenses associated with complying with such regulations;
•the Company’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards)standards and the effect of the transition to the Current Expected Credit Losses (CECL) methodology for allowances and related adjustments), including ourits ability to generate liquidity internally or raise capital on favorable terms;
•possible changes in trade, monetary and fiscal policies and stimulus programs, laws and regulations and other activities of governments, agencies, and similar organizations;organizations, and the uncertainty of the short- and long-term impacts of such changes;
•any impairments of the Company's goodwill or other intangible assets;
•conditions in the financial markets, including the destabilized economic environment caused by the COVID-19 pandemic, that may limit the Company’s access to additional funding to meet its liquidity needs;
•impairmentthe intention of the Company’s goodwill or other intangible assets;United Kingdom's Financial Conduct Authority (FCA) to cease support of London Inter-Bank Offered Rate (LIBOR) and the transition to an alternative reference interest rate;
•failure of the financial and operational controls of the Company’s Cash Connect® division;
•the success of the Company's growth plans, including its plans to grow the commercial small business leasing portfolio and residential mortgage, small business and Small Business Administration (SBA) portfolios following the acquisition of Beneficial Bancorp, Inc. (Beneficial);
•the successful integration of past and future acquisitions;
•the Company’s ability to fully realize the cost savings and other benefits of its acquisitions, manage risks related to business disruption following those acquisitions, and post-acquisition customerCustomer acceptance of the Company’s products and services and related customerCustomer disintermediation;
•negative perceptions or publicity with respect to the Company generally and, in particular, the Company’s trust and wealth management business;
•failure of the financial and operational controls of the Company’s Cash Connect® division;
•adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings;
•the Company's reliance on third parties for certain important functions, including the operation of its core systems, and any failures by such third parties;
•system failures or cybersecurity incidents or other breaches of the Company’s network security;security, particularly given widespread remote working arrangements;
•the Company’s ability to recruit and retain key employees;
•the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally;
•the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks;
•the effects of regional or national civil unrest (including any resulting branch or ATM closures or damage);
•possible changes in the speed of loan prepayments by the Company’s customersCustomers and loan origination or sales volumes;
•possible changes in the speed of prepayments of mortgage-backed securities due to changes in the interest rate environment, particularly as a result of the COVID-19 pandemic, and the related acceleration of premium amortization on prepayments in the event that prepayments accelerate;
•regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its stockholders;
•any reputation, credit, interest rate, market, operational, litigation, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
•the costs associated with resolving any problem loans, litigation and the effects of other risks and uncertainties, including those discussed in the Company’s Form 10-K for the year ended December 31, 2018 and other documents filed by the Company with the Securities and Exchange Commission (SEC) from time to time.
We cautionThe Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. The Company disclaims any duty to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as specifically required by law.
As used in this Quarterly Report on Form 10-Q, the terms “WSFS”, “the Company”, “registrant”, “we”, “us”, and “our” mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.
Cash Connect® is ourthe Company's registered trademark. Any other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 |
(Dollars in thousands, except per share data) | | (Unaudited) | | |
(Dollars in thousands, except per share and share data) | | (Dollars in thousands, except per share and share data) | | (Unaudited) | |
Interest income: | Interest income: | | Interest income: | |
Interest and fees on loans and leases | Interest and fees on loans and leases | | 124,800 | | | $ | 67,164 | | | $ | 340,918 | | | $ | 192,071 | | Interest and fees on loans and leases | | $ | 112,260 | | | $ | 129,001 | | | $ | 231,462 | | | $ | 216,118 | |
Interest on mortgage-backed securities | Interest on mortgage-backed securities | | 12,989 | | | 6,662 | | | 35,684 | | | 18,251 | | Interest on mortgage-backed securities | | 12,549 | | | 12,229 | | | 25,768 | | | 22,695 | |
Interest and dividends on investment securities: | Interest and dividends on investment securities: | | | | Interest and dividends on investment securities: | |
Taxable | Taxable | | 29 | | | 14 | | | 79 | | | 47 | | Taxable | | 102 | | | 31 | | | 117 | | | 50 | |
Tax-exempt | Tax-exempt | | 939 | | | 1,065 | | | 2,963 | | | 3,260 | | Tax-exempt | | 907 | | | 999 | | | 1,818 | | | 2,024 | |
Other interest income | Other interest income | | 2,505 | | | 510 | | | 4,098 | | | 1,550 | | Other interest income | | 65 | | | 643 | | | 573 | | | 1,593 | |
| | 141,262 | | | 75,415 | | | 383,742 | | | 215,179 | | | 125,883 | | | 142,903 | | | 259,738 | | | 242,480 | |
Interest expense: | Interest expense: | | | | | | | | | Interest expense: | | | | | | | | |
Interest on deposits | Interest on deposits | | 16,851 | | | 7,977 | | | 43,916 | | | 19,585 | | Interest on deposits | | 9,832 | | | 16,123 | | | 24,469 | | | 27,065 | |
Interest on Federal Home Loan Bank advances | Interest on Federal Home Loan Bank advances | | 1,099 | | | 2,097 | | | 4,495 | | | 7,096 | | Interest on Federal Home Loan Bank advances | | 625 | | | 806 | | | 1,455 | | | 3,396 | |
Interest on senior debt | Interest on senior debt | | 1,179 | | | 1,179 | | | 3,538 | | | 3,538 | | Interest on senior debt | | 1,180 | | | 1,180 | | | 2,359 | | | 2,359 | |
Interest on federal funds purchased | Interest on federal funds purchased | | 602 | | | 381 | | | 2,194 | | | 1,261 | | Interest on federal funds purchased | | 1 | | | 805 | | | 471 | | | 1,592 | |
Interest on trust preferred borrowings | Interest on trust preferred borrowings | | 693 | | | 677 | | | 2,136 | | | 1,871 | | Interest on trust preferred borrowings | | 484 | | | 717 | | | 1,070 | | | 1,443 | |
Interest on other borrowings | Interest on other borrowings | | 5 | | | 7 | | | 84 | | | 28 | | Interest on other borrowings | | 5 | | | 40 | | | 8 | | | 79 | |
| | 20,429 | | | 12,318 | | | 56,363 | | | 33,379 | | | 12,127 | | | 19,671 | | | 29,832 | | | 35,934 | |
Net interest income | Net interest income | | 120,833 | | | 63,097 | | | 327,379 | | | 181,800 | | Net interest income | | 113,756 | | | 123,232 | | | 229,906 | | | 206,546 | |
Provision for loan losses | | 4,121 | | | 3,716 | | | 23,970 | | | 9,864 | | |
Net interest income after provision for loan losses | | 116,712 | | | 59,381 | | | 303,409 | | | 171,936 | | |
Provision for credit losses | | Provision for credit losses | | 94,754 | | | 12,195 | | | 151,400 | | | 19,849 | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | | 19,002 | | | 111,037 | | | 78,506 | | | 186,697 | |
Noninterest income: | Noninterest income: | | | | | | | | | Noninterest income: | | | | | | | | |
Credit/debit card and ATM income | Credit/debit card and ATM income | | 13,115 | | | 11,239 | | | 38,307 | | | 31,753 | | Credit/debit card and ATM income | | 9,306 | | | 13,677 | | | 20,665 | | | 25,192 | |
Investment management and fiduciary income | Investment management and fiduciary income | | 10,459 | | | 10,029 | | | 30,988 | | | 29,462 | | Investment management and fiduciary income | | 10,929 | | | 10,382 | | | 21,891 | | | 20,529 | |
Deposit service charges | Deposit service charges | | 6,139 | | | 4,670 | | | 16,988 | | | 13,964 | | Deposit service charges | | 4,175 | | | 6,103 | | | 9,822 | | | 10,849 | |
Mortgage banking activities, net | Mortgage banking activities, net | | 3,152 | | | 1,509 | | | 8,090 | | | 4,938 | | Mortgage banking activities, net | | 8,494 | | | 2,846 | | | 11,965 | | | 4,938 | |
Loan fee income | | 823 | | | 693 | | | 2,358 | | | 1,859 | | |
Loan and lease fee income | | Loan and lease fee income | | 1,097 | | | 650 | | | 2,216 | | | 1,535 | |
Securities gains, net | Securities gains, net | | — | | | — | | | 78 | | | 21 | | Securities gains, net | | 1,908 | | | 63 | | | 2,601 | | | 78 | |
Unrealized gains on equity investments | | 21,344 | | | 3,249 | | | 26,175 | | | 18,595 | | |
Unrealized (losses) gains on equity investments, net | | Unrealized (losses) gains on equity investments, net | | (11) | | | 1,033 | | | 657 | | | 4,831 | |
Realized gain on sale of equity investment | Realized gain on sale of equity investment | | — | | | 3,757 | | | — | | | 3,757 | | Realized gain on sale of equity investment | | 22,052 | | | — | | | 22,052 | | | — | |
Bank owned life insurance income | Bank owned life insurance income | | 277 | | | 96 | | | 877 | | | 328 | | Bank owned life insurance income | | 445 | | | 383 | | | 420 | | | 600 | |
Other income | Other income | | 7,037 | | | 6,659 | | | 22,478 | | | 19,678 | | Other income | | 5,980 | | | 7,734 | | | 12,933 | | | 15,441 | |
| | 62,346 | | | 41,901 | | | 146,339 | | | 124,355 | | | 64,375 | | | 42,871 | | | 105,222 | | | 83,993 | |
Noninterest expense: | Noninterest expense: | | | | | | | | | Noninterest expense: | | | | | | | | |
Salaries, benefits and other compensation | Salaries, benefits and other compensation | | 48,914 | | | 30,641 | | | 133,669 | | | 91,438 | | Salaries, benefits and other compensation | | 48,757 | | | 48,550 | | | 94,103 | | | 84,755 | |
Occupancy expense | Occupancy expense | | 9,085 | | | 4,697 | | | 24,262 | | | 14,953 | | Occupancy expense | | 8,296 | | | 8,810 | | | 15,962 | | | 15,177 | |
Equipment expense | Equipment expense | | 5,564 | | | 3,258 | | | 14,997 | | | 9,523 | | Equipment expense | | 5,759 | | | 5,444 | | | 10,723 | | | 9,433 | |
Data processing and operations expenses | Data processing and operations expenses | | 3,861 | | | 1,962 | | | 10,180 | | | 5,765 | | Data processing and operations expenses | | 3,061 | | | 3,731 | | | 6,139 | | | 6,319 | |
Professional fees | Professional fees | | 3,180 | | | 2,358 | | | 7,967 | | | 6,403 | | Professional fees | | 4,423 | | | 2,915 | | | 9,023 | | | 4,787 | |
Marketing expense | Marketing expense | | 1,373 | | | 1,499 | | | 4,910 | | | 3,341 | | Marketing expense | | 1,215 | | | 1,947 | | | 2,166 | | | 3,537 | |
| FDIC expenses | FDIC expenses | | (227) | | | 518 | | | 1,435 | | | 1,632 | | FDIC expenses | | 305 | | | 1,042 | | | 251 | | | 1,662 | |
Loan workout and OREO expenses | | 574 | | | (19) | | | 1,827 | | | 1,088 | | |
Loan workout and other credit costs | | Loan workout and other credit costs | | 4,587 | | | 1,419 | | | 5,040 | | | 1,690 | |
Corporate development expense | Corporate development expense | | 10,517 | | | 3,794 | | | 51,090 | | | 4,251 | | Corporate development expense | | 2,801 | | | 13,946 | | | 4,142 | | | 40,573 | |
Restructuring expense | Restructuring expense | | 8,360 | | | — | | | 14,603 | | | — | | Restructuring expense | | — | | | 1,881 | | | — | | | 6,243 | |
Recovery of legal settlement | | — | | | (7,938) | | | — | | | (7,938) | | |
Recovery of fraud loss | | — | | | (10) | | | — | | | (1,675) | | |
| Other operating expense | Other operating expense | | 18,360 | | | 11,694 | | | 50,061 | | | 34,916 | | Other operating expense | | 14,231 | | | 18,163 | | | 34,382 | | | 31,264 | |
| | 109,561 | | | 52,454 | | | 315,001 | | | 163,697 | | | 93,435 | | | 107,848 | | | 181,931 | | | 205,440 | |
Income before taxes | | 69,497 | | | 48,828 | | | 134,747 | | | 132,594 | | |
Income tax provision | | 15,902 | | | 9,893 | | | 32,253 | | | 27,569 | | |
Net income | | $ | 53,595 | | | $ | 38,935 | | | $ | 102,494 | | | $ | 105,025 | | |
(Loss) income before taxes | | (Loss) income before taxes | | (10,058) | | | 46,060 | | | 1,797 | | | 65,250 | |
Income tax (benefit) provision | | Income tax (benefit) provision | | (2,247) | | | 10,091 | | | (959) | | | 16,351 | |
Net (loss) income | | Net (loss) income | | $ | (7,811) | | | $ | 35,969 | | | $ | 2,756 | | | $ | 48,899 | |
Less: Net loss attributable to noncontrolling interest | Less: Net loss attributable to noncontrolling interest | | (287) | | | — | | | (611) | | | — | | Less: Net loss attributable to noncontrolling interest | | (700) | | | (231) | | | (1,060) | | | (324) | |
Net income attributable to WSFS | | $ | 53,882 | | | $ | 38,935 | | | $ | 103,105 | | | $ | 105,025 | | |
Earnings per share: | | | | | | | | | |
Net (loss) income attributable to WSFS | | Net (loss) income attributable to WSFS | | $ | (7,111) | | | $ | 36,200 | | | $ | 3,816 | | | $ | 49,223 | |
(Loss) earnings per share: | | (Loss) earnings per share: | | | | | | | | |
Basic | Basic | | $ | 1.02 | | | $ | 1.22 | | | $ | 2.13 | | | $ | 3.32 | | Basic | | $ | (0.14) | | | $ | 0.68 | | | $ | 0.08 | | | $ | 1.07 | |
Diluted | Diluted | | $ | 1.02 | | | $ | 1.20 | | | $ | 2.12 | | | $ | 3.26 | | Diluted | | $ | (0.14) | | | $ | 0.68 | | | $ | 0.07 | | | $ | 1.06 | |
Weighted average shares of common stock outstanding: | | Weighted average shares of common stock outstanding: | |
Basic | | Basic | | 50,655,154 | | | 53,253,455 | | | 50,870,735 | | | 46,103,264 | |
Diluted | | Diluted | | 50,655,154 | | | 53,516,000 | | | 50,910,790 | | | 46,438,173 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
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| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2019 | | 2018 | | 2019 | | 2018 |
(Dollars in thousands) | | (Unaudited) | | | | (Unaudited) | | |
Net income | | $ | 53,595 | | | $ | 38,935 | | | $ | 102,494 | | | $ | 105,025 | |
Less: Net loss attributable to noncontrolling interest | | (287) | | | — | | | (611) | | | — | |
Net income attributable to WSFS | | 53,882 | | | 38,935 | | | 103,105 | | | 105,025 | |
Other comprehensive income (loss): | | | | | | | | |
Net change in unrealized gains (loss) on investment securities available for sale | | | | | | | | |
Net unrealized gains (loss) arising during the period, net of tax expense (benefit) of $2,911 and $(1,846), $14,565, and $(6,958), respectively | | 9,268 | | | (6,042) | | | 46,124 | | | (22,370) | |
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $0, $0, $19 and $5, respectively | | — | | | — | | | (59) | | | (16) | |
| | 9,268 | | | (6,042) | | | 46,065 | | | (22,386) | |
Net change in securities held to maturity | | | | | | | | |
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $22, $36, $78, and $109, respectively | | (70) | | | (107) | | | (247) | | | (343) | |
Net change in unfunded pension liability | | | | | | | | |
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of $(11), $(9), $(66) and $1, respectively | | (35) | | | (30) | | | (210) | | | (1) | |
Net change in cash flow hedge | | | | | | | | |
Net unrealized gain (loss) arising during the period, net of tax expense (benefit) of $116, $(75), $633 and $(391) respectively | | 368 | | | (109) | | | 2,005 | | | (1,119) | |
Total other comprehensive income (loss) | | 9,531 | | | (6,288) | | | 47,613 | | | (23,849) | |
Total comprehensive income | | $ | 63,413 | | | $ | 32,647 | | | $ | 150,718 | | | $ | 81,176 | |
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| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
(Dollars in thousands) | | (Unaudited) | | | | (Unaudited) | | |
Net (loss) income | | $ | (7,811) | | | $ | 35,969 | | | $ | 2,756 | | | $ | 48,899 | |
Less: Net loss attributable to noncontrolling interest | | (700) | | | (231) | | | (1,060) | | | (324) | |
Net (loss) income attributable to WSFS | | (7,111) | | | 36,200 | | | 3,816 | | | 49,223 | |
Other comprehensive income: | | | | | | | | |
Net change in unrealized gains on investment securities available-for-sale | | | | | | | | |
Net unrealized gains arising during the period, net of tax expense of $1,169, $6,289, $15,707 and $11,831, respectively | | 3,703 | | | 19,591 | | | 49,739 | | | 36,856 | |
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Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $458, $15, $624, and $19, respectively | | (1,450) | | | (48) | | | (1,977) | | | (59) | |
| | 2,253 | | | 19,543 | | | 47,762 | | | 36,797 | |
Net change in securities held-to-maturity | | | | | | | | |
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $18, $27, $38, and $56, respectively | | (57) | | | (84) | | | (122) | | | (177) | |
Net change in unfunded pension liability | | | | | | | | |
Change in unfunded pension liability related to unrealized gain (loss), prior service cost and transition obligation, net of tax benefit of $8, $8, $7, and $17, respectively | | (26) | | | (34) | | | (22) | | | (175) | |
Pension settlement, net of tax expense of $67, $0, $67, and $0, respectively | | 212 | | | — | | | 212 | | | — | |
| | 186 | | | (34) | | | 190 | | | (175) | |
Net change in cash flow hedge | | | | | | | | |
Net unrealized (loss) gain arising during the period, net of tax (benefit) expense of $(8), $323, $493, and $525, respectively | | (25) | | | 1,007 | | | 1,560 | | | 1,637 | |
Amortization of unrealized gain on terminated cash flow hedges, net of tax benefit of $35, $0, $35, and $0, respectively | | (111) | | | — | | | (111) | | | — | |
| | (136) | | | 1,007 | | | 1,449 | | | 1,637 | |
Total other comprehensive income | | 2,246 | | | 20,432 | | | 49,279 | | | 38,082 | |
Total comprehensive (loss) income | | $ | (4,865) | | | $ | 56,632 | | | $ | 53,095 | | | $ | 87,305 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
(Dollars in thousands, except per share and share data) | (Dollars in thousands, except per share and share data) | | (Unaudited) | | (Dollars in thousands, except per share and share data) | | (Unaudited) | |
Assets: | Assets: | | | | | Assets: | | | | |
Cash and due from banks | Cash and due from banks | | $ | 257,581 | | | $ | 134,939 | | Cash and due from banks | | $ | 583,221 | | | $ | 164,021 | |
Cash in non-owned ATMs | Cash in non-owned ATMs | | 322,571 | | | 484,648 | | Cash in non-owned ATMs | | 360,969 | | | 407,524 | |
Interest-bearing deposits in other banks including collateral of $0 at September 30, 2019 and $1,000 at December 31, 2018 | | 147 | | | 1,170 | | |
Interest-bearing deposits in other banks including collateral of $11,110 at June 30, 2020 and $0 December 31, 2019, respectively | | Interest-bearing deposits in other banks including collateral of $11,110 at June 30, 2020 and $0 December 31, 2019, respectively | | 11,577 | | | 207 | |
Total cash and cash equivalents | Total cash and cash equivalents | | 580,299 | | | 620,757 | | Total cash and cash equivalents | | 955,767 | | | 571,752 | |
Investment securities, available for sale (amortized cost of $1,867,358 at September 30, 2019 and $1,224,227 at December 31, 2018) | | 1,908,821 | | | 1,205,079 | | |
Investment securities, held to maturity (fair value $138,262 at September 30, 2019 and $149,431 at December 31, 2018) | | 134,961 | | | 149,950 | | |
Investment securities, available-for-sale (amortized cost of $2,097,114 at June 30, 2020 and $1,909,483 at December 31, 2019 | | Investment securities, available-for-sale (amortized cost of $2,097,114 at June 30, 2020 and $1,909,483 at December 31, 2019 | | 2,195,389 | | | 1,944,914 | |
Investment securities, held-to-maturity, net of allowance for credit losses of $8 at June 30, 2020 (fair value $132,198 at June 30, 2020 and $136,625 at December 31, 2019) | | Investment securities, held-to-maturity, net of allowance for credit losses of $8 at June 30, 2020 (fair value $132,198 at June 30, 2020 and $136,625 at December 31, 2019) | | 127,601 | | | 133,601 | |
Other investments | Other investments | | 70,055 | | | 37,233 | | Other investments | | 10,211 | | | 70,046 | |
Loans, held for sale at fair value | Loans, held for sale at fair value | | 67,428 | | | 25,318 | | Loans, held for sale at fair value | | 109,453 | | | 83,872 | |
Loans and leases, net of allowance of $47,671 at September 30, 2019 and $39,539 at December 31, 2018 | | 8,480,712 | | | 4,863,919 | | |
Loans and leases, net of allowance for credit losses of $232,192 at June 30, 2020 and $47,576 at December 31, 2019 | | Loans and leases, net of allowance for credit losses of $232,192 at June 30, 2020 and $47,576 at December 31, 2019 | | 9,120,288 | | | 8,424,464 | |
Bank owned life insurance | Bank owned life insurance | | 31,077 | | | 6,687 | | Bank owned life insurance | | 30,391 | | | 30,294 | |
Stock in Federal Home Loan Bank of Pittsburgh at cost | Stock in Federal Home Loan Bank of Pittsburgh at cost | | 22,630 | | | 19,259 | | Stock in Federal Home Loan Bank of Pittsburgh at cost | | 9,772 | | | 21,097 | |
Other real estate owned | Other real estate owned | | 3,693 | | | 2,668 | | Other real estate owned | | 4,153 | | | 2,605 | |
Accrued interest receivable | Accrued interest receivable | | 38,771 | | | 22,001 | | Accrued interest receivable | | 53,222 | | | 38,094 | |
Premises and equipment | Premises and equipment | | 105,042 | | | 44,956 | | Premises and equipment | | 99,320 | | | 104,465 | |
Goodwill | Goodwill | | 472,958 | | | 166,007 | | Goodwill | | 472,828 | | | 472,828 | |
Intangible assets | Intangible assets | | 98,892 | | | 20,016 | | Intangible assets | | 89,687 | | | 95,917 | |
Other assets | Other assets | | 257,334 | | | 65,020 | | Other assets | | 295,275 | | | 262,353 | |
Total assets | Total assets | | $ | 12,272,673 | | | $ | 7,248,870 | | Total assets | | $ | 13,573,357 | | | $ | 12,256,302 | |
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | | | | |
Liabilities: | Liabilities: | | Liabilities: | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing | Noninterest-bearing | | $ | 2,268,615 | | | $ | 1,626,252 | | Noninterest-bearing | | $ | 3,188,046 | | | $ | 2,189,573 | |
Interest-bearing | Interest-bearing | | 7,264,578 | | | 4,014,179 | | Interest-bearing | | 7,874,454 | | | 7,397,284 | |
| Total deposits | Total deposits | | 9,533,193 | | | 5,640,431 | | Total deposits | | 11,062,500 | | | 9,586,857 | |
Federal funds purchased | Federal funds purchased | | — | | | 157,975 | | Federal funds purchased | | — | | | 195,000 | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 365,675 | | | 328,465 | | Federal Home Loan Bank advances | | 106,395 | | | 112,675 | |
Trust preferred borrowings | Trust preferred borrowings | | 67,011 | | | 67,011 | | Trust preferred borrowings | | 67,011 | | | 67,011 | |
Senior debt | Senior debt | | 98,551 | | | 98,388 | | Senior debt | | 98,714 | | | 98,605 | |
Other borrowed funds | Other borrowed funds | | 23,546 | | | 47,949 | | Other borrowed funds | | 23,673 | | | 15,997 | |
Accrued interest payable | Accrued interest payable | | 9,481 | | | 1,900 | | Accrued interest payable | | 6,049 | | | 3,103 | |
Other liabilities | Other liabilities | | 318,759 | | | 85,831 | | Other liabilities | | 387,221 | | | 327,563 | |
Total liabilities | Total liabilities | | 10,416,216 | | | 6,427,950 | | Total liabilities | | 11,751,563 | | | 10,406,811 | |
Stockholders’ Equity: | Stockholders’ Equity: | | | | | Stockholders’ Equity: | | | | |
Common stock $0.01 par value, 90,000,000 shares authorized; issued 57,411,821 at September 30, 2019 and 56,926,978 at December 31, 2018 | | 575 | | | 569 | | |
Common stock $0.01 par value, 90,000,000 shares authorized; issued 57,533,236 at June 30, 2020 and 57,435,658 at December 31, 2019 | | Common stock $0.01 par value, 90,000,000 shares authorized; issued 57,533,236 at June 30, 2020 and 57,435,658 at December 31, 2019 | | 576 | | | 575 | |
Capital in excess of par value | Capital in excess of par value | | 1,047,035 | | | 349,810 | | Capital in excess of par value | | 1,050,678 | | | 1,049,064 | |
Accumulated other comprehensive income (loss) | | 32,219 | | | (15,394) | | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | | 72,780 | | | 23,501 | |
Retained earnings | Retained earnings | | 877,928 | | | 791,031 | | Retained earnings | | 878,585 | | | 917,377 | |
Treasury stock at cost, 4,967,022 shares at September 30, 2019 and 25,552,887 shares at December 31, 2018 | | (100,765) | | | (305,096) | | |
Treasury stock at cost, 6,873,120 shares at June 30, 2020 and 5,868,772 shares at December 31, 2019 | | Treasury stock at cost, 6,873,120 shares at June 30, 2020 and 5,868,772 shares at December 31, 2019 | | (178,950) | | | (140,211) | |
Total stockholders’ equity of WSFS | Total stockholders’ equity of WSFS | | 1,856,992 | | | 820,920 | | Total stockholders’ equity of WSFS | | 1,823,669 | | | 1,850,306 | |
Noncontrolling interest | Noncontrolling interest | | (535) | | | — | | Noncontrolling interest | | (1,875) | | | (815) | |
Total stockholders' equity | Total stockholders' equity | | 1,856,457 | | | 820,920 | | Total stockholders' equity | | 1,821,794 | | | 1,849,491 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | | $ | 12,272,673 | | | $ | 7,248,870 | | Total liabilities and stockholders' equity | | $ | 13,573,357 | | | $ | 12,256,302 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| | | Nine Months Ended September 30, 2019 | | | Six Months Ended June 30, 2020 | |
(Dollars in thousands, except per share and share amounts) | (Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity | (Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, December 31, 2018 | | 56,926,978 | | | $ | 569 | | | $ | 349,810 | | | $ | (15,394) | | | $ | 791,031 | | | $ | (305,096) | | | $ | 820,920 | | | $ | — | | | $ | 820,920 | | |
Balance, December 31, 2019 | | Balance, December 31, 2019 | | 57,435,658 | | | $ | 575 | | | $ | 1,049,064 | | | $ | 23,501 | | | $ | 917,377 | | | $ | (140,211) | | | $ | 1,850,306 | | | $ | (815) | | | $ | 1,849,491 | |
Cumulative change in accounting principle (Note 2) | | Cumulative change in accounting principle (Note 2) | | — | | | — | | | — | | | — | | | (30,368) | | | — | | | (30,368) | | | — | | | (30,368) | |
Balance, January 1, 2020 (as adjusted for change in accounting principle) | | Balance, January 1, 2020 (as adjusted for change in accounting principle) | | 57,435,658 | | | 575 | | | 1,049,064 | | | 23,501 | | | 887,009 | | | (140,211) | | | 1,819,938 | | | (815) | | | 1,819,123 | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | 103,105 | | | — | | | 103,105 | | | (611) | | | 102,494 | | Net income (loss) | | — | | | — | | | — | | | — | | | 3,816 | | | — | | | 3,816 | | | (1,060) | | | 2,756 | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | 47,613 | | | — | | | — | | | 47,613 | | | — | | | 47,613 | | Other comprehensive income | | — | | | — | | | — | | | 49,279 | | | — | | | — | | | 49,279 | | | — | | | 49,279 | |
Cash dividend, $0.35 per share | | — | | | — | | | — | | | — | | | (16,208) | | | — | | | (16,208) | | | — | | | (16,208) | | |
Cash dividend, $0.24 per share | | Cash dividend, $0.24 per share | | — | | | — | | | — | | | — | | | (12,240) | | | — | | | (12,240) | | | — | | | (12,240) | |
Issuance of common stock including proceeds from exercise of common stock options | Issuance of common stock including proceeds from exercise of common stock options | | 484,843 | | | 6 | | | 7,334 | | | — | | | — | | | — | | | 7,340 | | | — | | | 7,340 | | Issuance of common stock including proceeds from exercise of common stock options | | 97,578 | | | 1 | | | 990 | | | — | | | — | | | — | | | 991 | | | — | | | 991 | |
Re-issuance of treasury stock in connection with BNCL merger and related items | | — | | | — | | | 687,897 | | | — | | | — | | | 262,071 | | | 949,968 | | | 76 | | | 950,044 | | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | — | | | 1,994 | | | — | | | — | | | — | | | 1,994 | | | — | | | 1,994 | | Stock-based compensation expense | | — | | | — | | | 1,294 | | | — | | | — | | | — | | | 1,294 | | | — | | | 1,294 | |
Repurchases of common shares (1) | Repurchases of common shares (1) | | — | | | — | | | — | | | — | | | — | | | (57,740) | | | (57,740) | | | — | | | (57,740) | | Repurchases of common shares (1) | | — | | | — | | | (670) | | | — | | | — | | | (38,739) | | | (39,409) | | | — | | | (39,409) | |
Balance, September 30, 2019 | | 57,411,821 | | | $ | 575 | | | $ | 1,047,035 | | | $ | 32,219 | | | $ | 877,928 | | | $ | (100,765) | | | $ | 1,856,992 | | | $ | (535) | | | $ | 1,856,457 | | |
Balance, June 30, 2020 | | Balance, June 30, 2020 | | 57,533,236 | | | $ | 576 | | | $ | 1,050,678 | | | $ | 72,780 | | | $ | 878,585 | | | $ | (178,950) | | | $ | 1,823,669 | | | $ | (1,875) | | | $ | 1,821,794 | |
| | | Three Months Ended September 30, 2019 | | | | Three Months Ended June 30, 2020 | |
(Dollars in thousands, except per share and share amounts) | (Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity | (Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, June 30, 2019 | | 57,239,683 | | | $ | 573 | | | $ | 1,043,065 | | | $ | 22,688 | | | $ | 830,397 | | | $ | (60,112) | | | $ | 1,836,611 | | | $ | (223) | | | $ | 1,836,388 | | |
Balance, March 31, 2020 | | Balance, March 31, 2020 | | 57,506,298 | | | $ | 576 | | | $ | 1,050,658 | | | $ | 70,534 | | | $ | 891,776 | | | $ | (178,950) | | | $ | 1,834,594 | | | $ | (1,175) | | | $ | 1,833,419 | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | 53,882 | | | — | | | 53,882 | | | (287) | | | 53,595 | | Net income (loss) | | — | | | — | | | — | | | — | | | (7,111) | | | — | | | (7,111) | | | (700) | | | (7,811) | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | 9,531 | | | — | | | — | | | 9,531 | | | — | | | 9,531 | | Other comprehensive income | | — | | | — | | | — | | | 2,246 | | | — | | | — | | | 2,246 | | | — | | | 2,246 | |
Cash dividend, $0.12 per share | Cash dividend, $0.12 per share | | — | | | — | | | — | | | — | | | (6,351) | | | — | | | (6,351) | | | — | | | (6,351) | | Cash dividend, $0.12 per share | | — | | | — | | | — | | | — | | | (6,080) | | | — | | | (6,080) | | | — | | | (6,080) | |
Issuance of common stock including proceeds from exercise of common stock options | Issuance of common stock including proceeds from exercise of common stock options | | 172,138 | | | 2 | | | 3,211 | | | — | | | — | | | — | | | 3,213 | | | — | | | 3,213 | | Issuance of common stock including proceeds from exercise of common stock options | | 26,938 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
BNCL merger and related items | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (25) | | | (25) | | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | — | | | 759 | | | — | | | — | | | — | | | 759 | | | — | | | 759 | | Stock-based compensation expense | | — | | | — | | | 690 | | | — | | | — | | | — | | | 690 | | | — | | | 690 | |
Repurchases of common shares (2) | | — | | | — | | | — | | | — | | | — | | | (40,653) | | | (40,653) | | | — | | | (40,653) | | |
Balance, September 30, 2019 | | 57,411,821 | | | $ | 575 | | | $ | 1,047,035 | | | $ | 32,219 | | | $ | 877,928 | | | $ | (100,765) | | | $ | 1,856,992 | | | $ | (535) | | | $ | 1,856,457 | | |
Repurchases of common shares (1) | | Repurchases of common shares (1) | | — | | | — | | | (670) | | | — | | | — | | | — | | | (670) | | | — | | | (670) | |
Balance, June 30, 2020 | | Balance, June 30, 2020 | | 57,533,236 | | | $ | 576 | | | $ | 1,050,678 | | | $ | 72,780 | | | $ | 878,585 | | | $ | (178,950) | | | $ | 1,823,669 | | | $ | (1,875) | | | $ | 1,821,794 | |
(1)Repurchase of common stock includes 1,230,6401,004,348 shares repurchased in connection with the Company's share buybackrepurchase program approved by the Board of Directors, and 22,531 shares withheld to cover tax liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, December 31, 2018 | | 56,926,978 | | | $ | 569 | | | $ | 349,810 | | | $ | (15,394) | | | $ | 791,031 | | | $ | (305,096) | | | $ | 820,920 | | | $ | — | | | $ | 820,920 | |
Net income (loss) | | — | | | — | | | — | | | — | | | 49,223 | | | — | | | 49,223 | | | (324) | | | 48,899 | |
Other comprehensive income | | — | | | — | | | — | | | 38,082 | | | — | | | — | | | 38,082 | | | — | | | 38,082 | |
Cash dividend, $0.23 per share | | — | | | — | | | — | | | — | | | (9,857) | | | — | | | (9,857) | | | — | | | (9,857) | |
Issuance of common stock including proceeds from exercise of common stock options | | 312,705 | | | 4 | | | 4,123 | | | — | | | — | | | — | | | 4,127 | | | — | | | 4,127 | |
Re-issuance of treasury stock in connection with the Beneficial merger and related items | | — | | | — | | | 687,897 | | | — | | | — | | | 262,071 | | | 949,968 | | | 101 | | | 950,069 | |
Stock-based compensation expense | | — | | | — | | | 1,235 | | | — | | | — | | | — | | | 1,235 | | | — | | | 1,235 | |
Repurchases of common shares (1) | | — | | | — | | | — | | | — | | | — | | | (17,087) | | | (17,087) | | | — | | | (17,087) | |
Balance, June 30, 2019 | | 57,239,683 | | | $ | 573 | | | $ | 1,043,065 | | | $ | 22,688 | | | $ | 830,397 | | | $ | (60,112) | | | $ | 1,836,611 | | | $ | (223) | | | $ | 1,836,388 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, March 31, 2019 | | 56,941,493 | | | $ | 569 | | | $ | 1,038,494 | | | $ | 2,256 | | | $ | 800,511 | | | $ | (52,078) | | | $ | 1,789,752 | | | $ | (75) | | | $ | 1,789,677 | |
Net income (loss) | | — | | | — | | | — | | | — | | | 36,200 | | | — | | | 36,200 | | | (231) | | | 35,969 | |
Other comprehensive income | | — | | | — | | | — | | | 20,432 | | | — | | | — | | | 20,432 | | | — | | | 20,432 | |
Cash dividend, $0.12 per share | | — | | | — | | | — | | | — | | | (6,406) | | | — | | | (6,406) | | | — | | | (6,406) | |
Issuance of common stock including proceeds from exercise of common stock options | | 298,190 | | | 4 | | | 3,886 | | | — | | | — | | | — | | | 3,890 | | | — | | | 3,890 | |
Beneficial merger and related items | | — | | | — | | | — | | | — | | | 92 | | | — | | | 92 | | | 83 | | | 175 | |
Stock-based compensation expense | | — | | | — | | | 685 | | | — | | | — | | | — | | | 685 | | | — | | | 685 | |
Repurchases of common shares (2) | | — | | | — | | | — | | | — | | | — | | | (8,034) | | | (8,034) | | | — | | | (8,034) | |
Balance, June 30, 2019 | | 57,239,683 | | | $ | 573 | | | $ | 1,043,065 | | | $ | 22,688 | | | $ | 830,397 | | | $ | (60,112) | | | $ | 1,836,611 | | | $ | (223) | | | $ | 1,836,388 | |
(1)Repurchase of common stock includes 271,340 shares repurchased in connection with the Company's share repurchase program approved by the Board of Directors, and 132,993 shares repurchased to cover taxes due on the consideration transferred in the Beneficial acquisition related to the vesting of unrestricted Beneficial stock awards.
(2)Repurchase of common stock includes 959,300193,888 shares repurchased in connection with the Company's share buybackrepurchase program approved by the Board of Directors.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, December 31, 2017 | | 56,279,527 | | | $ | 563 | | | $ | 336,271 | | | $ | (8,152) | | | $ | 669,557 | | | $ | (273,894) | | | $ | 724,345 | | | $ | — | | | $ | 724,345 | |
Net income | | — | | | — | | | — | | | — | | | 105,025 | | | — | | | 105,025 | | | — | | | 105,025 | |
Other comprehensive loss | | — | | | — | | | — | | | (23,869) | | | — | | | — | | | (23,869) | | | — | | | (23,869) | |
Cash dividend, $0.31 per share | | — | | | — | | | — | | | — | | | (9,797) | | | — | | | (9,797) | | | — | | | (9,797) | |
Reclassification due to the adoption of ASU No. 2016-01 | | — | | | — | | | — | | | 20 | | | (20) | | | — | | | — | | | — | | | — | |
Issuance of common stock including proceeds from exercise of common stock options | | 600,808 | | | 4 | | | 9,772 | | | — | | | — | | | — | | | 9,776 | | | — | | | 9,776 | |
Stock-based compensation expense | | — | | | — | | | 1,857 | | | — | | | — | | | — | | | 1,857 | | | — | | | 1,857 | |
Repurchases of common shares, 167,000 shares | | — | | | — | | | — | | | — | | | — | | | (8,515) | | | (8,515) | | | — | | | (8,515) | |
Balance, September 30, 2018 | | 56,880,335 | | | $ | 567 | | | $ | 347,900 | | | $ | (32,001) | | | $ | 764,765 | | | $ | (282,409) | | | $ | 798,822 | | | $ | — | | | $ | 798,822 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share and share amounts) | | Shares | | Common Stock | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders' Equity of WSFS | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, June 30, 2018 | | 56,685,384 | | | $ | 566 | | | $ | 344,750 | | | $ | (25,713) | | | $ | 729,329 | | | $ | (279,955) | | | $ | 768,977 | | | $ | — | | | $ | 768,977 | |
Net income | | — | | | — | | | — | | | — | | | 38,935 | | | — | | | 38,935 | | | — | | | 38,935 | |
Other comprehensive loss | | — | | | — | | | — | | | (6,288) | | | — | | | — | | | (6,288) | | | — | | | (6,288) | |
Cash dividend, $0.11 per share | | — | | | — | | | — | | | — | | | (3,499) | | | — | | | (3,499) | | | — | | | (3,499) | |
Reclassification due to the adoption of ASU No. 2016-01 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock including proceeds from exercise of common stock options | | 194,951 | | | 1 | | | 2,713 | | | — | | | — | | | — | | | 2,714 | | | — | | | 2,714 | |
Stock-based compensation expense | | — | | | — | | | 437 | | | — | | | — | | | — | | | 437 | | | — | | | 437 | |
Repurchases of common shares, 47,000 shares | | — | | | — | | | — | | | — | | | — | | | (2,454) | | | (2,454) | | | — | | | (2,454) | |
Balance, September 30, 2018 | | 56,880,335 | | | $ | 567 | | | $ | 347,900 | | | $ | (32,001) | | | $ | 764,765 | | | $ | (282,409) | | | $ | 798,822 | | | $ | — | | | $ | 798,822 | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | | 2019 | | 2018 | | | 2020 | | 2019 |
(Dollars in thousands) | (Dollars in thousands) | | (Unaudited) | | (Dollars in thousands) | | (Unaudited) | |
Operating activities: | Operating activities: | | Operating activities: | |
Net income | Net income | | $ | 102,494 | | | $ | 105,025 | | Net income | | $ | 2,756 | | | $ | 48,899 | |
Less: Net loss attributable to noncontrolling interest | | (611) | | | — | | |
Net income attributable to WSFS | | $ | 103,105 | | | $ | 105,025 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Provision for loan losses | | 23,970 | | | 9,864 | | |
Provision for credit losses | | Provision for credit losses | | 151,400 | | | 19,849 | |
Depreciation of premises and equipment, net | Depreciation of premises and equipment, net | | 11,139 | | | 6,347 | | Depreciation of premises and equipment, net | | 7,933 | | | 7,203 | |
Amortization of fees and discounts, net | | (32,308) | | | 11,952 | | |
(Accretion) amortization of fees and discounts, net | | (Accretion) amortization of fees and discounts, net | | (27,442) | | | 24,079 | |
Amortization of intangible assets | Amortization of intangible assets | | 8,348 | | | 2,223 | | Amortization of intangible assets | | 5,528 | | | 5,658 | |
Amortization of right of use lease asset | Amortization of right of use lease asset | | 19,842 | | | — | | Amortization of right of use lease asset | | 6,356 | | | 12,982 | |
Decrease in operating lease liability | Decrease in operating lease liability | | (9,999) | | | — | | Decrease in operating lease liability | | (7,008) | | | (4,405) | |
Income from mortgage banking activities, net | Income from mortgage banking activities, net | | (8,090) | | | (4,938) | | Income from mortgage banking activities, net | | (11,965) | | | (4,938) | |
Gain on sale of securities, net | Gain on sale of securities, net | | (78) | | | (21) | | Gain on sale of securities, net | | (2,601) | | | (78) | |
Loss on sale of other real estate owned and valuation adjustments, net | Loss on sale of other real estate owned and valuation adjustments, net | | 63 | | | 83 | | Loss on sale of other real estate owned and valuation adjustments, net | | 10 | | | 63 | |
Stock-based compensation expense | Stock-based compensation expense | | 1,994 | | | 1,857 | | Stock-based compensation expense | | 1,294 | | | 1,235 | |
Unrealized gain on equity investments | | (26,175) | | | (18,595) | | |
Unrealized gain on equity investments, net | | Unrealized gain on equity investments, net | | (657) | | | (4,831) | |
Realized gain on sale of equity investment | | Realized gain on sale of equity investment | | (22,052) | | | — | |
| Deferred income tax expense | | 6,106 | | | 3,330 | | |
Decrease (increase) in accrued interest receivable | | 729 | | | (1,926) | | |
Decrease in other assets | | 8,582 | | | 3,171 | | |
Deferred income tax (benefit) expense | | Deferred income tax (benefit) expense | | (38,596) | | | 1,205 | |
Increase in accrued interest receivable | | Increase in accrued interest receivable | | (15,128) | | | (1,284) | |
(Increase) decrease in other assets | | (Increase) decrease in other assets | | (3,743) | | | 23,060 | |
Origination of loans held for sale | Origination of loans held for sale | | (325,103) | | | (265,674) | | Origination of loans held for sale | | (404,036) | | | (190,508) | |
Proceeds from sales of loans held for sale | Proceeds from sales of loans held for sale | | 271,679 | | | 257,026 | | Proceeds from sales of loans held for sale | | 377,786 | | | 154,508 | |
Increase in accrued interest payable | Increase in accrued interest payable | | 7,581 | | | 6,083 | | Increase in accrued interest payable | | 2,946 | | | 5,164 | |
Increase (decrease) in other liabilities | Increase (decrease) in other liabilities | | 17,938 | | | (5,273) | | Increase (decrease) in other liabilities | | 59,651 | | | (3,411) | |
| Increase in value of bank owned life insurance | Increase in value of bank owned life insurance | | (1,590) | | | (311) | | Increase in value of bank owned life insurance | | (97) | | | (632) | |
Increase in capitalized interest, net | Increase in capitalized interest, net | | (2,698) | | | (2,795) | | Increase in capitalized interest, net | | (1,909) | | | (1,808) | |
Net cash provided by operating activities | Net cash provided by operating activities | | $ | 75,035 | | | $ | 107,428 | | Net cash provided by operating activities | | $ | 80,426 | | | $ | 92,010 | |
Investing activities: | Investing activities: | | | | | Investing activities: | | | | |
| Repayments, maturities and calls of investment securities held to maturity | | 15,130 | | | 7,055 | | |
Sale of investment securities available for sale | | 602,467 | | | 7,012 | | |
Purchases of investment securities available for sale | | (800,020) | | | (280,401) | | |
Repayments of investment securities available for sale | | 170,646 | | | 82,501 | | |
| Repayments, maturities and calls of investment securities held-to-maturity | | Repayments, maturities and calls of investment securities held-to-maturity | | 9,675 | | | 8,235 | |
Sale of investment securities available-for-sale | | Sale of investment securities available-for-sale | | 109,605 | | | 602,432 | |
Purchases of investment securities available-for-sale | | Purchases of investment securities available-for-sale | | (535,146) | | | (619,652) | |
Repayments of investment securities available-for-sale | | Repayments of investment securities available-for-sale | | 232,426 | | | 90,009 | |
Net proceeds from sale of Visa Class B shares | | Net proceeds from sale of Visa Class B shares | | 85,850 | | | — | |
Proceeds from bank-owned life insurance surrender | Proceeds from bank-owned life insurance surrender | | 59,710 | | | 96,429 | | Proceeds from bank-owned life insurance surrender | | — | | | 59,711 | |
Net decrease (increase) in loans | | 125,511 | | | (119,641) | | |
Net (increase) decrease in loans | | Net (increase) decrease in loans | | (839,620) | | | (20,646) | |
Net cash from business combinations | Net cash from business combinations | | 76,072 | | | — | | Net cash from business combinations | | — | | | 76,072 | |
Purchases of stock of Federal Home Loan Bank of Pittsburgh | Purchases of stock of Federal Home Loan Bank of Pittsburgh | | (176,966) | | | (137,199) | | Purchases of stock of Federal Home Loan Bank of Pittsburgh | | (145,399) | | | (95,750) | |
Redemptions of stock of Federal Home Loan Bank of Pittsburgh | Redemptions of stock of Federal Home Loan Bank of Pittsburgh | | 196,777 | | | 151,943 | | Redemptions of stock of Federal Home Loan Bank of Pittsburgh | | 156,724 | | | 122,317 | |
Sales of other real estate owned | Sales of other real estate owned | | 1,866 | | | 2,323 | | Sales of other real estate owned | | 875 | | | 1,610 | |
Investment in premises and equipment | Investment in premises and equipment | | (10,701) | | | (4,910) | | Investment in premises and equipment | | (2,830) | | | (5,510) | |
Sales of premises and equipment | Sales of premises and equipment | | 71 | | | 201 | | Sales of premises and equipment | | 45 | | | 71 | |
Net cash provided by (used in) investing activities | | $ | 260,563 | | | $ | (194,687) | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | $ | (927,795) | | | $ | 218,899 | |
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | | 2019 | | 2018 | | | 2020 | | 2019 |
(Dollars in thousands) | (Dollars in thousands) | | (Unaudited) | | (Dollars in thousands) | | (Unaudited) | |
Financing activities: | Financing activities: | | Financing activities: | |
Net increase in demand and saving deposits | | $ | 55,527 | | | $ | 341,411 | | |
Net increase (decrease) in demand and saving deposits | | Net increase (decrease) in demand and saving deposits | | $ | 1,580,924 | | | $ | (75,871) | |
(Decrease) increase in time deposits | (Decrease) increase in time deposits | | (81,783) | | | 83,788 | | (Decrease) increase in time deposits | | (128,170) | | | 25,640 | |
(Decrease) increase in brokered deposits | | (161,892) | | | 57,638 | | |
Increase (decrease) in brokered deposits | | Increase (decrease) in brokered deposits | | 30,568 | | | (81,028) | |
| Receipts from FHLB advances | Receipts from FHLB advances | | 27,146,456 | | | 85,335,984 | | Receipts from FHLB advances | | 5,037,296 | | | 23,341,156 | |
Repayments of FHLB advances | Repayments of FHLB advances | | (27,109,246) | | | (85,707,520) | | Repayments of FHLB advances | | (5,043,576) | | | (23,553,946) | |
Receipts from federal funds purchased | Receipts from federal funds purchased | | 21,475,000 | | | 18,821,100 | | Receipts from federal funds purchased | | 8,025,475 | | | 15,056,950 | |
Repayments of federal funds purchased | Repayments of federal funds purchased | | (21,632,975) | | | (18,849,100) | | Repayments of federal funds purchased | | (8,220,475) | | | (15,099,925) | |
| Dividends paid | Dividends paid | | (16,208) | | | (9,797) | | Dividends paid | | (12,240) | | | (9,857) | |
Issuance of common stock and exercise of common stock options | Issuance of common stock and exercise of common stock options | | 7,340 | | | 9,776 | | Issuance of common stock and exercise of common stock options | | 991 | | | 4,127 | |
| Change in noncontrolling interest | | (535) | | | — | | |
| | Purchase of common stock | Purchase of common stock | | (57,740) | | | (8,515) | | Purchase of common stock | | (39,409) | | | (17,087) | |
Net cash (used in) provided by financing activities | | $ | (376,056) | | | $ | 74,765 | | |
Decrease in cash and cash equivalents | | (40,458) | | | (12,494) | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | $ | 1,231,384 | | | $ | (409,841) | |
Increase (decrease) in cash and cash equivalents | | Increase (decrease) in cash and cash equivalents | | 384,015 | | | (98,932) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 620,757 | | | 723,866 | | Cash and cash equivalents at beginning of period | | 571,752 | | | 620,757 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 580,299 | | | $ | 711,372 | | Cash and cash equivalents at end of period | | $ | 955,767 | | | $ | 521,825 | |
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | | | | Supplemental disclosure of cash flow information: | | | | |
Cash paid during the period for: | Cash paid during the period for: | | Cash paid during the period for: | |
Interest | Interest | | $ | 48,782 | | | $ | 27,297 | | Interest | | $ | 26,886 | | | $ | 30,771 | |
Income taxes | Income taxes | | 24,579 | | | 21,754 | | Income taxes | | 3,610 | | | 15,987 | |
Non-cash information: | Non-cash information: | | Non-cash information: | |
Loans transferred to other real estate owned | Loans transferred to other real estate owned | | 2,344 | | | 1,907 | | Loans transferred to other real estate owned | | 2,503 | | | 2,098 | |
Loans transferred to portfolio from held-for-sale at fair value | Loans transferred to portfolio from held-for-sale at fair value | | 19,278 | | | 7,261 | | Loans transferred to portfolio from held-for-sale at fair value | | 11,065 | | | 14,846 | |
Fair value of assets acquired, net of cash received | Fair value of assets acquired, net of cash received | | 5,032,299 | | | — | | Fair value of assets acquired, net of cash received | | — | | | 5,033,367 | |
Fair value of liabilities assumed | Fair value of liabilities assumed | | 5,108,371 | | | — | | Fair value of liabilities assumed | | — | | | 5,109,931 | |
Impact of ASC 842 Adoption: | Impact of ASC 842 Adoption: | | Impact of ASC 842 Adoption: | |
Right of use asset | Right of use asset | | 121,288 | | | — | | Right of use asset | | — | | | 121,288 | |
Lease liability | Lease liability | | (132,346) | | | — | | Lease liability | | — | | | (132,346) | |
Impact of ASC 326 Adoption (Note 2): | | Impact of ASC 326 Adoption (Note 2): | |
Allowance for credit losses on held-to-maturity debt securities | | Allowance for credit losses on held-to-maturity debt securities | | (8) | | | — | |
Allowance for credit losses on loans and leases | | Allowance for credit losses on loans and leases | | (35,855) | | | — | |
Deferred tax assets | | Deferred tax assets | | 8,461 | | | — | |
Allowance for credit losses on unfunded lending commitments | | Allowance for credit losses on unfunded lending commitments | | (2,966) | | | — | |
Retained earnings | | Retained earnings | | 30,368 | | | — | |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020
(UNAUDITED)
1. BASIS OF PRESENTATION
General
OurThese unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (the Company or WSFS), Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress) and, Christiana Trust Company of Delaware (Christiana Trust DE). We and WSFS SPE Services, LLC. The Company also havehas 1 unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has 43 wholly owned subsidiaries: Beneficial Equipment Finance Corporation (BEFC), WSFS Investment Group, Inc. (WSFS Wealth Investments), and 1832 Holdings, Inc., and WSFS SPE Services, LLC, and 1 majority-owned subsidiary, NewLane Finance Company (NewLane Finance).
Overview
Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). We provideThe Company provides residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. OurThe core banking business is commercial lending funded primarily by customer-generated deposits. In addition, we offerthe Company offers a variety of wealth management and trust services to personal and corporate customers. The Federal Deposit Insurance Corporation (FDIC) insures ourthe customers’ deposits to their legal maximums. We serve ourThe Company serves its customers primarily from 127115 offices located in Pennsylvania (56)(54), Delaware ((49)43), New Jersey (20)(16), Virginia (1) (1)and Nevada (1) and through our, its ATM network, website at www.wsfsbank.com. and mobile app. Information on ourthe website is not incorporated by reference into this Quarterly Report on Form 10-Q.
OurThe Company's leasing business is conducted by NewLane Finance (formerly Neumann Finance Company). During the third quarter of 2019, the leasing operations of NewLane Finance and BEFC were combined and all new leases are now originated at 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.
Basis of Presentation
In preparing the unaudited Consolidated Financial Statements, we arethe Company is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Amounts subject to significant estimates include the allowance for loancredit losses (including loans and lease lossesleases held for investment, investment securities available-for-sale and reserves forheld-to-maturity), lending-related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, and income taxes and other-than-temporary impairment (OTTI).taxes. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets, the establishment of theadditional allowance and lending-related commitmentscommitment reserves as well as increased post-retirement benefits expense.
OurThe Company's accounting and reporting policies conform to Generally Accepted Accounting Principles in the U.S. (GAAP), prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2019.2020. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in ourthe Annual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 Annual Report on Form 10-K) that was filed with the SEC on February 28, 2019March 2, 2020 and is available at www.sec.gov or on ourthe website at www.wsfsbank.com. All significant intercompany accounts and transactions were eliminated in consolidation.
Business Combinations
On March 1, 2019, we acquired Beneficial Bancorp, Inc. (Beneficial), including its subsidiary Beneficial Bank, a community bank headquartered in Philadelphia, Pennsylvania, creating the largest, premier, locally-headquartered bank in the Greater Delaware Valley. Beneficial merged with and into WSFS, with WSFS continuing as the surviving corporation and simultaneously, Beneficial Bank merged with and into WSFS Bank, with WSFS Bank continuing as the surviving bank. This acquisition grew our market share, deepened our presence in the Philadelphia, southeastern Pennsylvania and New Jersey markets, and enhanced our customer base. The results of Beneficial's operations are included in our unaudited Consolidated Financial Statements since the date of the acquisition. See Note 3 for further information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies:SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies used in preparation of ourthe Consolidated Financial Statements are disclosed in our 2018the Company's 2019 Annual Report on Form 10-K. Those significant accounting policies remain unchanged at SeptemberJune 30, 2019,2020, except as described below:
Loans
Loans held for investment are recorded at amortized cost, net of allowance for credit losses. Amortized cost is the amount at which a financial asset is originated or acquired, adjusted for the amortization of premium and discount, net deferred fees or costs, collection of cash, and write-offs. Interest income on loans is recognized using the level yield method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity.
Allowance for Credit Losses - Loans and Leases
We account for our leasesThe Company establishes its allowance in accordance with guidance provided in ASC 842326, Financial Instruments - LeasesCredit Losses. MostThe allowance for credit losses includes quantitative and qualitative factors that comprise management's current estimate of ourexpected credit losses, including the Company's portfolio mix and segmentation, modeling methodology, historical loss experience, relevant available information from internal and external sources relating to reasonable and supportable forecasts about future economic conditions, prepayment speeds, and qualitative adjustment factors.
The Company's portfolio segments, established based on similar risk characteristics and loss behaviors, are:
•Commercial and industrial, owner-occupied commercial, commercial mortgages, construction and commercial small business leases (collectively, commercial loans), and
•Residential, equity secured lines and loans, installment loans, unsecured lines of credit and education loans (collectively, retail loans).
Expected credit losses are recognized on the balance sheet by recording a right-of-use asset and lease liability for each lease. The right-of-use asset represents the right to use the asset under lease for the lease term, and the lease liability representsestimated over the contractual obligationterm, adjusted for expected prepayments and recoveries. The contractual term excludes any extensions, renewals and modifications unless the Company has reasonable expectations at the reporting date that it will result in a troubled debt restructuring (TDR) or they are not unconditionally cancellable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to make lease payments. be charged-off.
The right-of-use asset is testedallowance includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for impairment whenever events or changes in circumstances indicate the carrying amount maycredit losses (collective basis) and (ii) an allowance established on loans which do not be recoverable.share similar risk characteristics with any loan segment and are individually evaluated for credit losses (individual basis).
As a lessee, WSFS enters into operating leasesLoans that share similar risk characteristics are collectively reviewed for certain bank branches, office space,credit loss and office equipment. The right-of-use assets and lease liabilities are initially recognizedevaluated based on historical loss experience, adjusted for current economic conditions and future economic forecasts. Estimated losses are determined differently for commercial and retail loans, and each portfolio segment is further segmented by internally assessed risk ratings.
The Company uses a third-party economic forecast to adjust the net present valuecalculated historical loss rates of the remaining lease payments which include renewal options where management is reasonably certain they will be exercised.portfolio segments. The net present value is determined usingCompany's economic forecast extends out 6 quarters (the forecast period) and reverts to the incremental collateralized borrowing rate at commencement date. The right-of-use asset is measured at the amount of the lease liability adjusted for any prepaid rent, lease incentives and initial direct costs incurred. The right-of-use asset and lease liability is amortized over the individual lease terms. Lease expense for lease payments is recognizedhistorical loss rates on a straight-line basis over 4 quarters (the reversion period) as it believes this to be reasonable and supportable in the lease term.
As a lessor, WSFS provides direct financing to our customers through our equipmentcurrent environment. The economic forecast and small-business leasing business. Direct financing leases are recorded at the aggregate of minimum lease payments net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease. Origination fees and costs are deferred, and the net amount is amortized to interest income over the estimated life of the lease.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2019
ASU No. 2016-02, Leases (Topic 842): In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises lessee accounting. Under the new guidance, lesseesreversion periods will be required to recognize a lease liabilityevaluated periodically by the Company and a right-of-use assetupdated as appropriate.
The historical loss rates for substantially all leases. The new lease guidance also simplifiescommercial loans are estimated by determining the accounting for saleprobability of default (PD) and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the comparative modified retrospective transition approach is required; however, in July 2018, the FASB issued ASU 2018-11, Leases-Targeted Improvements, which provides an optional transition method whereby comparative periods presented in the financial statements in the period of adoption do not need to be restated under Topic 842. The Company adopted this guidance and its related amendments on January 1, 2019 using the transition option in ASU 2018-11 and the results of this adoption are recorded in the Consolidated Statements of Financial Condition. See Note 9 for additional disclosures resulting from our adoption of this standard.
ASU No. 2019-01, Leases (Topic 842),Codification Improvements:Subsequent to adopting ASU 2016-02, in March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which makes targeted changes to lessor accounting and clarifies interim transition disclosure requirements upon adopting Topic 842. The guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance on March 31, 2019. See Note 9 for additional disclosures resulting from our adoption of this standard.
ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities:In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securitiesexpected loss given default (LGD). The new guidance requires the amortization period for certain non-contingent callable debt securities held at a premium to end at the earliest call dateprobability of the debt security. If the call optiondefault is not exercised at the earliest call date, the guidance requires the debt security's effective yield to be resetcalculated based on the historical rate of migration to an event of credit loss during the look-back period. The historical loss rates for retail loans is calculated based solely on average net loss rates over the same look-back period. The current look-back period is 38 quarters which ensures historical loss rates are adequately considering losses within a full credit cycle.
Loans that do not share similar risk characteristics with any loan segments are evaluated on an individual basis. These loans, which may include TDRs, are not included in the collective basis evaluation. When it is probable the Company will not collect all principal and interest due according to their contractual payment terms, which is assessed based on the credit characteristics of the debt security. loan and/or payment status, these loans are individually reviewed and measured for potential credit loss.
The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Useamount of the modified retrospective method, with a cumulative-effect adjustment to retained earningspotential credit loss is required. The Company adopted this standard on January 1, 2019, on a modified retrospectivemeasured using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the fair value of collateral, if the loan is collateral dependent; or (iii) the loan’s observable market price. If the measured fair value of the loan is less than the amortized cost basis andof the adoption did not haveloan, an effect on the Consolidated Financial Statements.
allowance for credit loss is recorded.
For collateral dependent loans, the expected credit losses at the individual asset level is the difference between the collateral's fair value (less cost to sell) and the amortized cost.
Qualitative adjustment factors consider various internal and external conditions which are allocated among loan segments and take into consideration:
ASU No. 2017-12, •Targeted ImprovementsCurrent underwriting policies, staff and portfolio concentrations,
•Risk rating accuracy, credit and administration,
•Internal risk emergence (including internal trends of delinquency, and criticized loans by segment),
•Economic forecasts and conditions - locally and nationally (including market trends impacting collateral values), and
•Competitive environment, as it could impact loan structure and underwriting.
These factors are based on their relative standing compared to Accountingthe period in which historical losses are used in quantitative reserve estimates and current directional trends, and reasonable and supportable forecasts. Qualitative factors in the model can add to or subtract from quantitative reserves.
The Company's loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review the Company's loan ratings and allowance for Hedging Activities (Topic 815):credit losses and the Bank's internal loan review department performs loan reviews.
Accrued interest receivable on loans is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Statements of Financial Condition.
For additional detail regarding the allowance for credit losses and the provision for credit losses, see Note 7.
Past Due and Nonaccrual Loans
Past due loans are defined as loans contractually past due 30 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.
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 loan is not well secured and in the process of collection. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In August 2017,addition, the FASB issued ASU No. 2017-12, Targeted Improvementsamortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to Accounting for Hedging Activities (Topic 815). The new guidance changes both the designation and measurement guidance for qualifying hedging relationships and simplifiesoutstanding principal balance or recorded as interest income, depending on the presentation of hedge results. Specifically, the guidance eliminates the requirement to separately measure and report hedge ineffectiveness and aligns the recognition and presentationCompany’s assessment of the effectsultimate collectability of principal and interest. Loans are returned to accrual status when the hedging instrument andCompany assesses that the hedged item in the financial statements. Further, the new guidance provides entitiesborrower has the ability to apply hedge accounting to additional hedging strategies as well as permitsmake all principal and interest payments in accordance with the terms of the loan (i.e. a one-time reclassificationconsistent repayment record, generally six consecutive payments, has been demonstrated).
Unless loans are well-secured and collection is imminent, for loans greater than 90 days past due their respective reserves are generally charged off once the loss has been confirmed. Expected recoveries do not exceed the aggregate of eligibleamounts previously charged off and expected to be hedged instrumentscharged off.
A loan, for which the terms have been modified resulting in a concession to the borrower experiencing financial difficulty, is considered a TDR. Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance demonstrated, as noted above, and repayment is reasonably assured.
On March 27, 2020, the CARES Act was signed into law, which allows financial institutions to exclude eligible loan modifications from heldTDR reporting under its loan forbearance program. Eligible modifications must be related to maturity to available for sale upon adoption. The guidance is effective in annualthe COVID-19 pandemic, executed on a loan that was not more than 30 days past due as of December 31, 2019 and interim periods beginningexecuted between March 1, 2020 and the earlier of 60 days after December 15, 2018. Early adoption is permitted. Adoption using the modified retrospective approach is required for hedging relationships that exist as of the date of adoption; presentationthe termination of the national emergency or December 31, 2020. Management has elected to account and disclosure requirementsreport eligible modifications under the provisions of the CARES Act.
For additional detail regarding past due and nonaccrual loans, see Note 7.
Debt Securities
Investments in debt securities are applied prospectively. classified into one of the following three categories and accounted for as follows:
•Securities purchased with the intent of selling them in the near future are classified as “trading” and reported at fair value, with unrealized gains and losses included in earnings.
•Securities purchased with the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at amortized cost.
•Securities not classified as either trading or held-to-maturity are classified as “available-for-sale” and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as a separate component of stockholders’ equity in accumulated other comprehensive income (loss). Realized gains and losses on sales of investment and mortgage-backed securities (MBS) are determined using the specific identification method. All sales are made without recourse.
Debt securities mostly include mortgage-backed securities (MBS), municipal bonds, and U.S. government and agency securities. Premiums and discounts on MBS collateralized by residential 1-4 family loans are recognized in interest income using a level yield method over the period to expected maturity. Premiums and discounts on all other securities are recognized on a straight line basis over the period to expected maturity, with the exception of premiums on callable debt securities, which are recognized over the period to the earliest call date.
The fair value of debt securities is primarily obtained from third-party pricing services. Implicit in the valuation of MBS are estimated prepayments based on historical and current market conditions.
A debt security is placed on nonaccrual status at the time any principal or interest payments are contractually past due 90 days or more. Interest accrued but not received for a security placed on nonaccrual status is reversed against interest income.
The Company's investment portfolio is reviewed each quarter for indications of potential credit losses. Refer to the respective held-to-maturity and available-for-sale debt securities sections for management's discussion of the allowance for credit loss for each portfolio.
Allowance for Credit Losses - Held-to-Maturity Debt Securities
The Company adopted this standardfollows Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Loss - Measured at Amortized Cost, to measure expected credit losses on January 1, 2019,held-to-maturity debt securities on a modified retrospectivecollective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information adjusted by a security's credit rating.
The Company classifies the held-to-maturity debt securities into the following major security types: state and political subdivisions, and foreign bonds. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for existing hedging relationships andthe security. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a prospective basis for presentationquarterly basis.
Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and disclosure requirements. The adoption of this standard did not have an effectis included in Accrued interest receivable on the Consolidated Statements of Financial Statements. See Note 15Condition.
Allowance for additional disclosures resultingCredit Losses - Available-for-Sale Debt Securities
The Company follows ASC 326-30, Financial Instruments - Credit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Company first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to Noninterest income in the Consolidated Statements of Income.
For debt securities available-for-sale which the Company does not intend to sell, or it is not likely the security would be required to be sold before recovery, it evaluates whether a decline in fair value has resulted from our adoptioncredit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Company compares the present value of this standard.cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security.
The Company performs this analysis on a quarterly basis to review the conditions and Hedging - Inclusionrisks associated with the individual securities. Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows. Any impairment not recorded through an allowance for credit loss is included in other comprehensive income (loss), net of the Secured Overnight Financial Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Topic 815):In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging - Inclusion of the Secured Overnight Financial Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Topic 815).tax effect. The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidanceCompany is required to use its judgment in determining impairment in certain circumstances.
For additional detail regarding debt securities, see Note 5.
Unfunded Lending Commitments
For unfunded lending commitments, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the probability of default and utilization rate at default to calculate expected credit losses on commitments expected to be adopted concurrently with ASU 2017-12,funded based on a prospective basishistorical losses.
The allowance for qualifying new or redesignated hedging relationships entered into on or after adoption. The Company adopted this standard on January 1, 2019 on a prospective basis and the adoption did not have an effectcredit losses for off-balance sheet exposures is included in Other liabilities on the Consolidated Statements of Financial Statements.Condition and the provision for credit losses for off-balance sheet exposure is included in Loan workout and other credit costs on the Consolidated Statements of Income.
For additional detail regarding the allowance for credit losses and the provision for credit losses, see Note 16.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Pending Adoption at September 30, 2019
Adopted in 2020
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with the current expected credit losses (CECL) methodology which requires management consideration and requires considerationjudgment of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired assets will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifiesclarifying that receivables arising from operating leaseslease receivables are not within the scope of Topic 326. In December 2018, federal regulators issued a final rule related to regulatory capital (and CECL (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other RegulationsRegulations)) which is, intended to provide regulatory capital relief tofor entities transitioning to CECL. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which providesproviding entities the option to irrevocably elect the fair value option on eligible financial instruments, withinwhich excluded held-to-maturity debt securities. In November 2019, the scopeFASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, clarifying guidance on expected recoveries for purchased credit deteriorated financial assets, accrued interest receivable and collateral maintenance provisions and providing transition relief for troubled debt restructurings. In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments, clarifying the contractual term of both ASC 326-20a net investment in a lease and ASC 825-10 upon adoptionthe requirement to establish an allowance for credit loss when an entity regains control of ASU 2016-13.sold financial assets.
This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. TheWhile the CARES Act provided an option to defer implementation of the CECL methodology, the Company will adoptadopted this guidance on January 1, 2020. The adoption of this guidance will affect our accounting2020, using the modified retrospective approach for loans, leases, purchased financial assets debt securities,recorded at amortized cost with the exception of purchase credit deteriorated (PCD) assets, which were previously classified as purchase credit impaired (PCI) accounted for under ASC 310-30, adopted using the prospective approach. The cumulative effect of the adoption resulted in a $30.4 million decrease to the beginning balance of retained earnings as of January 1, 2020. Results and unfunded commitments. A cross-functional team from Finance, Credit, and Information Technology is leading the implementation efforts, anddisclosures for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to assessbe reported in accordance with previously applicable GAAP. For further details on the impact of this guidance on the Company’sadoption, accounting policies, elections, and practical expedients applied, see updated Significant Accounting Policies and CECL disclosures throughout the Notes to the Consolidated Financial Statements, internal systems, accounting policies, processes and related internal controls. We have completed the implementation of our software solution and a third-party specialist has completed an independent model review of the solution. Further, we have defined our loan portfolio categories, credit loss methodologies, reasonable and supportable forecast and reversion periods. Our implementation efforts continue to focus on our comprehensive evaluation of model outputs based on the implementation decisions made to date, as well as defining the framework and evaluating the impact of qualitative adjustment factors, and refining our allowance for credit losses (ACL) governance framework. We are in the process of finalizing our accounting policies and reporting requirements under the guidance as well as implementation and transition rules issued by regulators. As necessary, we will continue to consult with third-party experts and specialists to assist with our adoption efforts.
Our implementation efforts to date suggest that adoption may materially increase the allowance for credit losses and decrease capital levels; however, the extent of these impacts will depend on the composition and asset quality of the portfolio, macroeconomic conditions, and continued refinement of significant estimates and judgments by management at the time of adoption.
Statements.
The following table illustrates the impact of ASC 326 on loans, leases, purchased financial assets, debt securities, other assets and unfunded lending commitments compared to the incurred loss approach, as disclosed prior to adoption on January 1, 2020.
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2020 | | | | |
| | As reported under ASC 326 | | Pre-ASC 326 Adoption | | Impact of ASC 326 Adoption |
(Dollars in thousands) | | | | | | |
Assets: | | | | | | |
Investment securities, held-to-maturity | | | | | | |
State and political subdivisions | | $ | (8) | | | $ | — | | | $ | (8) | |
| | | | | | |
Allowance for credit losses on held-to-maturity debt securities | | $ | (8) | | | $ | — | | | $ | (8) | |
Loans and leases | | | | | | |
Commercial and industrial(1) | | (42,596) | | | (22,849) | | | (19,747) | |
Owner-occupied commercial | | (3,144) | | | (4,616) | | | 1,472 | |
Commercial mortgages | | (9,114) | | | (7,452) | | | (1,662) | |
Construction | | (4,572) | | | (3,891) | | | (681) | |
Residential | | (8,903) | | | (1,381) | | | (7,522) | |
Consumer | | (15,102) | | | (7,387) | | | (7,715) | |
Allowance for credit losses on loans and leases | | $ | (83,431) | | | $ | (47,576) | | | $ | (35,855) | |
Other assets | | | | | | |
Deferred tax assets | | 18,452 | | | 9,991 | | | 8,461 | |
Liabilities: | | | | | | |
Other liabilities | | | | | | |
Allowance for credit losses on unfunded lending commitments | | (4,513) | | | (1,547) | | | (2,966) | |
Total ASC 326 impact to retained earnings | | | | | | $ | 30,368 | |
(1)Includes commercial small business leases.
ASU No. 2018-13, Fair Value Measurement Disclosure Framework: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework, which amendsamended ASC 820 - Fair Value Measurement. The new guidance modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption is required on either a prospective or retrospective basis, depending on the amendment. The Company does not expectadopted this standard on January 1, 2020. See Note 13 for changes to financial statement disclosures resulting from the applicationadoption of this guidance to have a material impact on the Consolidated Financial Statements.standard.
ASU No. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plans-General (Topic 715): In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plans-General (Topic 715) which applies to all employers that provide defined benefit pension or other postretirement benefit plans for their employees. The new guidance modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements to financial statement users. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the retrospective method is required. The Company does not expectearly adopted this standard on January 1, 2020. See Note 11 for changes to financial statement disclosures resulting from the applicationadoption of this guidance to have a material impact on the Consolidated Financial Statements.standard.
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350). The new guidance providesprovided clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption can be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our preliminary review ofThe Company adopted this guidancestandard on January 1, 2020, on a prospective basis with no impact to date suggests that adoption may result in a material amount of implementation costs being deferred; however, the extent of the impact will depend on the cloud computing implementations occurringConsolidated Financial Statements at the time of adoption.
ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-CreditInstruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments: In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.The new guidance amendsamended ASU 2016-13 to address topics related to accrued interest receivables, recoveries, disclosures, and provides certain other clarifications. The new guidance also amendsamended ASU 2017-12 to provide clarification on certain hedge accounting topics and transition requirements. Lastly, the new guidance amendsamended ASU 2016-01,Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, to add clarifying guidance when using the measurement alternative under ASC 820, among certain other clarifications. The guidance is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. Adoption is required on a prospective, modified-retrospective or retrospective basis, depending on the amendment. The Company will evaluateincluded the amendments related to ASU 2016-13 in conjunction with our overall evaluationas part of ASU 2016-13. Forits CECL guidance implementation and adoption at January 1, 2020. The Company adopted other amendments within this guidance on January 1, 2020 with no impact to the Consolidated Financial Statements at the time of adoption.
Accounting Guidance Pending Adoption at June 30, 2020
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance adds new amendments to simplify income tax accounting and removes certain exceptions and modifies the accounting for certain income tax transactions. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Adoption is required on a prospective, modified-retrospective or retrospective basis, depending on the amendment. The Company does not expect the application of this guidance to have a material impact on the Consolidated Financial Statements.
ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815: In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The new guidance clarifies that observable transactions under the measurement alternative method (ASC 321) should be considered when applying or discontinuing the equity method of accounting (ASC 323). The guidance also clarifies that certain non-derivative forward contracts and purchase call options to acquire securities, should be measured at fair value before settlement or exercise. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the prospective method is required. The Company does not expect the application of this guidance to have a material impact on the Consolidated Financial Statements.
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting: In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance to entities for a limited period of time to ease the transition in accounting for and recognizing the effects of reference rate reform on financial reporting. Under the guidance, modifications of contracts due to reference rate reform will not require contract remeasurement or reassessment of a previous accounting determination. For hedge accounting, modification of critical terms of the hedge due to changes in reference rate reform will not affect hedge accounting or dedesignate the hedging relationship. The guidance also provides specific expedients for fair value hedges, cash flow hedges, and excluded components. Further, the guidance provides a one-time election to sell or transfer held to maturity debt securities that are affected by the reference rate change. The guidance is effective upon issuance through December 31, 2022. The Company will apply the guidance to any contracts modifications made due to reference rate reform.
3. BUSINESS COMBINATIONS
Beneficial Bancorp, Inc.
On March 1, 2019, we acquired Beneficial. Subject to the terms and conditions of the merger agreement, the Beneficial stockholders received 0.3013 shares of WSFS common stock and $2.93 in cash for each share of Beneficial common stock. Based on the February 28, 2019 closing share price of $43.28, the value of the stock consideration was $950.0 million and cash consideration was $228.2 million, for total transaction value of $1.2 billion. Results of the combined Company’s operations are included in our Consolidated Financial Statements since the date of the acquisition.
Beneficial conducted its primary business operations through its wholly owned subsidiary, Beneficial Bank, which was merged into WSFS Bank. At closing, Beneficial had 74 branches and offices in southeastern Pennsylvania and southern New Jersey. WSFS acquired Beneficial to expand the scale and efficiency of its operations in the Philadelphia, southeastern Pennsylvania and New Jersey markets, and to create opportunities to generate additional revenue by providing its full suite of banking, mortgage banking, wealth management and insurance services to the legacy Beneficial markets.
The acquisition of Beneficial was accounted for as a business combination using the acquisition method of accounting and, accordingly, the assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The excess of consideration transferred over the fair value of net assets acquired was recorded as goodwill, which is not amortizable nor deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. While the valuation of acquired assets and liabilities is nearly completed, management continues to assess the values of certain assets and liabilities which may be subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. When the valuation is final, any changes to the valuation of acquired assets and liabilities could result in adjustments to identified intangibles and goodwill. The fair values of assets acquired and liabilities assumed is expected to be finalized during the measurement period, which ends one year from the closing date.
The following table summarizes the consideration transferred and the fair values of identifiable assets acquired and liabilities assumed:
| | | | | |
(Dollars in thousands) | |
Consideration Transferred: | Fair Value |
Common shares issued (21,816,355) | $ | 949,968 | |
Cash paid to Beneficial stock and option holders | 228,239 | |
Value of consideration | 1,178,207 | |
Assets acquired: | |
Cash and due from banks | 304,311 | |
Investment securities | 619,853 | |
Loans and leases, net | 3,711,246 | |
Premises and equipment | 69,873 | |
Deferred income taxes | 18,485 | |
Bank owned life insurance | 82,510 | |
Core deposit intangible | 85,053 | |
Servicing rights intangible | 2,466 | |
Other assets | 135,862 | |
Total assets | 5,029,659 | |
Liabilities assumed: | |
Deposits | 4,056,506 | |
| |
Other liabilities | 101,897 | |
Total liabilities | 4,158,403 | |
Net assets acquired: | 871,256 | |
Goodwill resulting from acquisition of Beneficial | $ | 306,951 | |
The following table details the change to goodwill recorded subsequent to acquisition:
| | | | | | | | |
(Dollars in thousands) | | Fair Value |
Goodwill resulting from the acquisition of Beneficial reported as of March 31, 2019 | | $ | 309,486 | |
Effects of adjustments to: | | |
Cash and due from banks | | 246 | |
Investment securities | | (3,150) | |
Loans | | 911 | |
Premises and equipment | | (741) | |
Deferred income taxes | | 985 | |
Other assets | | (418) | |
Deposits | | 790 | |
Other liabilities | | (1,158) | |
Adjusted goodwill resulting from the acquisition of Beneficial as of September 30, 2019 | | $ | 306,951 | |
In many cases, the fair values of the assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and applying the appropriate market discount rates.
Acquired loans are initially recorded at their fair values as of the acquisition date. The fair value is based on a discounted cash flow methodology that uses assumptions as to credit risk, default rates, collateral values, and loss severity, along with estimated prepayment rates. Loans that have deteriorated in credit quality since their origination, and for which it is probable that all contractual cash flows will not be received, are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For additional information regarding purchased impaired loans, see Note 7 to the unaudited Consolidated Financial Statements.
The acquired investment portfolio had a fair value of $619.9 million, of which $578.8 million of investment securities were sold subsequent to closing. The proceeds received for the investments sold approximated their fair values as of the acquisition date. The fair value of the retained investment portfolio was determined by taking into account market prices obtained from independent valuation source(s). See Note 14 for additional information.
The Company recorded a deferred income tax asset (DTA) of $18.5 million related to tax attributes of Beneficial along with the effects of fair value adjustments resulting from acquisition accounting for the combination.
WSFS recorded $85.1 million of core deposit intangible which is being amortized over ten years using a straight-line amortization methodology. The fair value of the core deposit intangible was determined based on modeling assumptions that take into consideration customer attrition, deposit interest rates, and alternative costs of funds.
Certificates of deposit accounts were valued by segregating the portfolio into pools based on remaining maturity and comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The valuation adjustment will be accreted or amortized to interest expense over the remaining maturities of the respective pools.
As a result of the merger, the Company developed a comprehensive integration plan under which we have incurred direct costs, which were expensed as incurred. These direct costs include costs related to: (i) terminated contracts, (ii) consolidated facilities (including lease termination expenses), (iii) severance, (iv) marketing, and (v) professional and legal fees. Costs related to the acquisition and restructuring are included in the “Corporate Development” and “Restructuring” expense line items, respectively, on the Consolidated Statements of Income.
During the fourth quarter of 2018, WSFS announced a retail banking office optimization plan that included the consolidation of 14 Beneficial and 11 WSFS Bank banking offices. Most of the consolidations were completed during the conversion and rebranding of the remaining Beneficial banking offices, which occurred during the third quarter of 2019. Costs related to this plan are included in the “Corporate Development” expense line item on the Consolidated Statements of Income. Additionally, during the second quarter of 2019, WSFS completed the sale of 5 Beneficial retail banking offices in New Jersey to the Bank of Princeton, a New Jersey-based financial institution, at a deposit premium of 7.37%.
4. NONINTEREST INCOME
Credit/debit card and ATM income
The following table presents the components of credit/debit card and ATM income:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Bailment fees | Bailment fees | $ | 6,580 | | | $ | 7,188 | | | $ | 20,388 | | | $ | 19,869 | | Bailment fees | $ | 3,080 | | | $ | 6,908 | | | $ | 8,161 | | | $ | 13,807 | |
Interchange fees | Interchange fees | 6,234 | | | 3,766 | | | 17,073 | | | 11,073 | | Interchange fees | 5,631 | | | 6,452 | | | 11,247 | | | 10,839 | |
Other card and ATM fees | Other card and ATM fees | 301 | | | 285 | | | 846 | | | 811 | | Other card and ATM fees | 595 | | | 317 | | | 1,257 | | | 546 | |
Total credit/debit card and ATM income | Total credit/debit card and ATM income | $ | 13,115 | | | $ | 11,239 | | | $ | 38,307 | | | $ | 31,753 | | Total credit/debit card and ATM income | $ | 9,306 | | | $ | 13,677 | | | $ | 20,665 | | | $ | 25,192 | |
Credit/debit card and ATM income is composed of bailment fees, interchange fees, and other card and ATM fees. Bailment fees are earned from bailment arrangements with our customers. Bailment arrangements are legal relationships in which property is delivered to another party without a transfer of ownership. The party who transferred the property (the bailor) retains ownership interest of the property. In the event that the bailee files for bankruptcy protection, the property is not included in the bailee's assets. The bailee pays an agreed-upon fee for the use of the bailor's property in exchange for the bailor allowing use of the assets at the bailee's site. Bailment fees are earned from cash that is made available for customers' use at an offsite location, such as cash located in an ATM at a customer's place of business. These fees are typically indexed to a market interest rate. This revenue stream generates fee income through monthly billing for bailment services.
Credit/debit card and ATM income also includes interchange fees. Interchange fees are paid by a merchant's bank to a bank that issued a debit or credit card used in a transaction to compensate the issuing bank for the value and benefit the merchant receives from accepting electronic payments. These revenue streams generate fee income at the time a transaction occurs and are recorded as revenue at the time of the transaction.
Investment management and fiduciary income
The following table presents the components of investment management and fiduciary income:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Trust fees | Trust fees | $ | 6,632 | | | $ | 5,932 | | | $ | 19,884 | | | $ | 17,298 | | Trust fees | $ | 7,308 | | | $ | 6,685 | | | $ | 14,262 | | | $ | 13,250 | |
Wealth management and advisory fees | Wealth management and advisory fees | 3,827 | | | 4,097 | | | 11,104 | | | 12,164 | | Wealth management and advisory fees | 3,621 | | | 3,697 | | | 7,629 | | | 7,279 | |
Total investment management and fiduciary income | Total investment management and fiduciary income | $ | 10,459 | | | $ | 10,029 | | | $ | 30,988 | | | $ | 29,462 | | Total investment management and fiduciary income | $ | 10,929 | | | $ | 10,382 | | | $ | 21,891 | | | $ | 20,529 | |
Investment management and fiduciary income is composed of trust fees and wealth management and advisory fees. Trust fees are based on revenue earned from custody, escrow and trustee services on structured finance transactions; indenture trustee, administrative agent and collateral agent services to institutions and corporations; commercial domicile and independent director services; and investment and trustee services to families and individuals.individuals across the U.S. Most fees are flat fees, except for a portion of personal and corporate trustee fees where we earnthe Company earns a percentage on the assets under management. This revenue stream primarily generates fee income through monthly, quarterly and annual billings for services provided.
Wealth management and advisory fees consists of fees from Cypress, West Capital, Cypress, Powdermill and WSFS Wealth Client Management, WSFS Wealth Investments and WSFS Institutional Services.Investments. Wealth management and advisory fees are based on revenue earned from services including asset management, financial planning, family office, and brokerage. The fees are based on the market value of assets, are assessed as a flat fee, or are brokerage commissions. This revenue stream primarily generates fee income through quarterly and annual billing for the services.
Deposit service charges
The following table presents the components of deposit service charges:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Service fees | Service fees | $ | 3,188 | | | $ | 2,663 | | | $ | 9,083 | | | $ | 7,877 | | Service fees | $ | 2,919 | | | $ | 3,179 | | | $ | 6,130 | | | $ | 5,895 | |
Return and overdraft fees | Return and overdraft fees | 2,797 | | | 1,885 | | | 7,341 | | | 5,662 | | Return and overdraft fees | 1,134 | | | 2,696 | | | 3,466 | | | 4,544 | |
Other deposit service fees | Other deposit service fees | 154 | | | 122 | | | 564 | | | 425 | | Other deposit service fees | 122 | | | 228 | | | 226 | | | 410 | |
Total deposit service charges | Total deposit service charges | $ | 6,139 | | | $ | 4,670 | | | $ | 16,988 | | | $ | 13,964 | | Total deposit service charges | $ | 4,175 | | | $ | 6,103 | | | $ | 9,822 | | | $ | 10,849 | |
Deposit service charges includes revenue earned from our core deposit products, certificates of deposit, and brokered deposits. We generateThe Company generates fee revenues from deposit service charges primarily through service charges and overdraft fees. Service charges consist primarily of monthly account maintenance fees, cash management fees, foreign ATM fees and other maintenance fees. All of these revenue streams generate fee income through service charges for monthly account maintenance and similar items, transfer fees, late fees, overlimit fees, and stop payment fees. Revenue is recorded at the time of the transaction.
Other income
The following table presents the components of other income:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Managed service fees | Managed service fees | $ | 3,628 | | | $ | 3,169 | | | $ | 10,195 | | | $ | 9,100 | | Managed service fees | $ | 3,724 | | | $ | 3,624 | | | $ | 7,755 | | | $ | 6,566 | |
Currency preparation | Currency preparation | 823 | | | 863 | | | 2,413 | | | 2,406 | | Currency preparation | 919 | | | 851 | | | 1,759 | | | 1,590 | |
ATM insurance | 644 | | | 586 | | | 1,923 | | | 1,781 | | |
ATM loss protection | | ATM loss protection | 571 | | | 652 | | | 1,218 | | | 1,280 | |
Miscellaneous products and services | Miscellaneous products and services | 1,942 | | | 2,041 | | | 7,947 | | | 6,391 | | Miscellaneous products and services | 766 | | | 2,607 | | | 2,201 | | | 6,005 | |
Total other income | Total other income | $ | 7,037 | | | $ | 6,659 | | | $ | 22,478 | | | $ | 19,678 | | Total other income | $ | 5,980 | | | $ | 7,734 | | | $ | 12,933 | | | $ | 15,441 | |
Other income consists of managed service fees, which are primarily courier fees related to cash management, currency preparation, ATM insuranceloss protection and other miscellaneous products and services offered by the Bank. These fees are primarily generated through monthly billings or at the time of the transaction. ForMiscellaneous products and services include gains from the ninesale of SBA loans, which were higher during the three and six months ended SeptemberJune 30, 2019, "Miscellaneous products and services" included income related to a non-recurring transfer of client accounts to a departing Wealth investment adviser,advisor in accordance with the buy-out provisions of the adviser's contract.advisor's contract, which occurred during the six months ended June 30, 2019.
Arrangements with multiple performance obligations
OurThe Company's contracts with customers may include multiple performance obligations. For such arrangements, we allocatethe Company allocates revenue to each performance obligation based on its relative standalone selling price. WeThe Company generally determinedetermines standalone selling prices based on the prices charged to customers.
Practical expedients and exemptions
We doThe Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognizethe Company recognizes revenue at the amount to which we haveit has the right to invoice for services performed.
See Note 1615 for further information about the disaggregation of noninterest income by segment.
5.4. (LOSS) EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars and shares in thousands, except per share data) | (Dollars and shares in thousands, except per share data) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars and shares in thousands, except per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | | | | |
Net income attributable to WSFS | $ | 53,882 | | | $ | 38,935 | | | $ | 103,105 | | | $ | 105,025 | | |
Net (loss) income attributable to WSFS | | Net (loss) income attributable to WSFS | $ | (7,111) | | | $ | 36,200 | | | $ | 3,816 | | | $ | 49,223 | |
Denominator: | Denominator: | | | | | | | | Denominator: | | | | | | | |
Weighted average basic shares | Weighted average basic shares | 52,863 | | | 31,800 | | | 48,381 | | | 31,599 | | Weighted average basic shares | 50,655 | | | 53,253 | | | 50,871 | | | 46,103 | |
Dilutive potential common shares(1) | Dilutive potential common shares(1) | 191 | | | 548 | | | 287 | | | 663 | | Dilutive potential common shares(1) | — | | | 263 | | | 40 | | | 335 | |
Weighted average fully diluted shares | Weighted average fully diluted shares | $ | 53,054 | | | $ | 32,348 | | | $ | 48,668 | | | $ | 32,262 | | Weighted average fully diluted shares | $ | 50,655 | | | $ | 53,516 | | | $ | 50,911 | | | $ | 46,438 | |
Earnings per share: | | | | | | | | |
(Loss) earnings per share: | | (Loss) earnings per share: | | | | | | | |
Basic | Basic | $ | 1.02 | | | $ | 1.22 | | | $ | 2.13 | | | $ | 3.32 | | Basic | $ | (0.14) | | | $ | 0.68 | | | $ | 0.08 | | | $ | 1.07 | |
Diluted | Diluted | $ | 1.02 | | | $ | 1.20 | | | $ | 2.12 | | | $ | 3.26 | | Diluted | $ | (0.14) | | | $ | 0.68 | | | $ | 0.07 | | | $ | 1.06 | |
Outstanding common stock equivalents having no dilutive effect | Outstanding common stock equivalents having no dilutive effect | 1 | | | 11 | | | 1 | | | 16 | | Outstanding common stock equivalents having no dilutive effect | 48 | | | 1 | | | 15 | | | 1 | |
(1)For the three months ended June 30, 2020, the effect of 14 thousand dilutive potential common shares were excluded from the computation of diluted net loss per common share, as these shares would have been antidilutive due to the net loss reported in this period.
6. INVESTMENT SECURITIES
5. INVESTMENTS
Debt Securities
The following tables detail the amortized cost, allowance for credit losses and the estimated fair value of ourthe Company's investments in available-for-sale and held-to-maturity debt securities as well as our equity investments.securities. NaN of ourthe Company's investments in debt securities are classified as trading.
| | | September 30, 2019 | | | June 30, 2020 | |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Allowance for Credit Losses | | Fair Value |
Available-for-Sale Debt Securities | Available-for-Sale Debt Securities | | | | | | | | | Available-for-Sale Debt Securities | | | | | | | | | | |
CMO | CMO | | $ | 358,826 | | | $ | 6,550 | | | $ | 130 | | | $ | 365,246 | | CMO | | $ | 343,725 | | | $ | 12,185 | | | $ | 89 | | | $ | — | | | $ | 355,821 | |
FNMA MBS | FNMA MBS | | 1,136,645 | | | 27,118 | | | 1,016 | | | 1,162,747 | | FNMA MBS | | 1,326,940 | | | 67,158 | | | 63 | | | — | | | 1,394,035 | |
FHLMC MBS | FHLMC MBS | | 338,326 | | | 8,690 | | | 261 | | | 346,755 | | FHLMC MBS | | 280,752 | | | 16,795 | | | — | | | — | | | 297,547 | |
GNMA MBS | GNMA MBS | | 33,561 | | | 584 | | | 72 | | | 34,073 | | GNMA MBS | | 29,567 | | | 1,257 | | | — | | | — | | | 30,824 | |
GSE | | GSE | | 116,130 | | | 1,071 | | | 39 | | | — | | | 117,162 | |
| | $ | 1,867,358 | | | $ | 42,942 | | | $ | 1,479 | | | $ | 1,908,821 | | | $ | 2,097,114 | | | $ | 98,466 | | | $ | 191 | | | $ | — | | | $ | 2,195,389 | |
Held-to-Maturity Debt Securities(1) | Held-to-Maturity Debt Securities(1) | | | | | | | | | Held-to-Maturity Debt Securities(1) | | | | | | | | | | |
State and political subdivisions | State and political subdivisions | | $ | 132,959 | | | $ | 3,298 | | | $ | — | | | $ | 136,257 | | State and political subdivisions | | $ | 127,108 | | | $ | 4,597 | | | $ | — | | | $ | 8 | | | $ | 131,697 | |
Foreign bonds | Foreign bonds | | 2,002 | | | 3 | | | — | | | 2,005 | | Foreign bonds | | 501 | | | — | | | — | | | — | | | 501 | |
| | $ | 134,961 | | | $ | 3,301 | | | $ | — | | | $ | 138,262 | | | $ | 127,609 | | | $ | 4,597 | | | $ | — | | | $ | 8 | | | $ | 132,198 | |
| | Equity Investments(2) | | |
Visa Class B shares | | $ | 15,716 | | | $ | 45,565 | | | $ | — | | | $ | 61,281 | | |
Other equity investments | | 8,149 | | | 625 | | | — | | | 8,774 | | |
| $ | 23,865 | | | $ | 46,190 | | | $ | — | | | $ | 70,055 | | |
(1)Held-to-maturity securities transferred from available-for-sale are included in held-to-maturity at amortized cost basis at the time of transfer. The amortized cost of transferred held-to-maturity securities included net unrealized gains of $0.5 million at June 30, 2020, related to securities transferred, which are offset in Accumulated other comprehensive income. At the time of transfer, there was no allowance for credit loss on the available-for-sale securities. Subsequent to transfer, the securities were evaluated for credit loss. See Note 2 for updated Significant Accounting Policies on held-to-maturity debt securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Available-for-Sale Debt Securities | | | | | | | | |
CMO | | $ | 336,194 | | | $ | 4,578 | | | $ | 542 | | | $ | 340,230 | |
FNMA MBS | | 1,219,522 | | | 25,717 | | | 2,786 | | | 1,242,453 | |
FHLMC MBS | | 320,896 | | | 8,641 | | | 591 | | | 328,946 | |
GNMA MBS | | 32,871 | | | 477 | | | 63 | | | 33,285 | |
| | $ | 1,909,483 | | | $ | 39,413 | | | $ | 3,982 | | | $ | 1,944,914 | |
Held-to-Maturity Debt Securities(1) | | | | | | | | |
State and political subdivisions | | $ | 131,600 | | | $ | 3,023 | | | $ | — | | | $ | 134,623 | |
Foreign bonds | | 2,001 | | | 1 | | | — | | | 2,002 | |
| | $ | 133,601 | | | $ | 3,024 | | | $ | — | | | $ | 136,625 | |
(1)Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $0.7$0.6 million at September 30,December 31, 2019, related to securities transferred, which are offset in Accumulated other comprehensive income net of tax.
(2)Equity investments are included in Other investments in the unaudited Consolidated Statements of Financial Condition.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Available-for-Sale Debt Securities | | | | | | | | |
CMO | | $ | 376,867 | | | $ | 1,721 | | | $ | 6,838 | | | $ | 371,750 | |
FNMA MBS | | 655,485 | | | 1,526 | | | 12,938 | | | 644,073 | |
FHLMC MBS | | 155,758 | | | 558 | | | 2,394 | | | 153,922 | |
GNMA MBS | | 36,117 | | | 97 | | | 880 | | | 35,334 | |
| | $ | 1,224,227 | | | $ | 3,902 | | | $ | 23,050 | | | $ | 1,205,079 | |
Held-to-Maturity Debt Securities(1) | | | | | | | | |
State and political subdivisions | | $ | 149,950 | | | $ | 275 | | | $ | 794 | | | $ | 149,431 | |
| | | | | | | | |
Equity Investments(2) | | | | | | | | |
Visa Class B shares | | $ | 13,918 | | | $ | 20,015 | | | $ | — | | | $ | 33,933 | |
Other equity investments | | 3,300 | | | — | | | — | | | 3,300 | |
| | $ | 17,218 | | | $ | 20,015 | | | $ | — | | | $ | 37,233 | |
(1)Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $1.0 million at December 31, 2018, related to securities transferred, which are offset in Accumulated other comprehensive loss, net of tax.
(2)Equity investments are included in Other investments in the unaudited Consolidated Statements of Financial Condition.
.
The scheduled maturities of our available-for-sale debt securities at SeptemberJune 30, 20192020 and December 31, 20182019 are presented in the table below:
| | | | Available for Sale | | | | Available-for-Sale | |
| | | Amortized | | Fair | | | Amortized | | Fair |
(Dollars in thousands) | (Dollars in thousands) | | Cost | | Value | (Dollars in thousands) | | Cost | | Value |
September 30, 2019 (1) | | | | | |
June 30, 2020 (1) | | June 30, 2020 (1) | | | | |
Within one year | Within one year | | $ | — | | | $ | — | | Within one year | | $ | — | | | $ | — | |
After one year but within five years | After one year but within five years | | 18,892 | | | 19,000 | | After one year but within five years | | 33,142 | | | 34,759 | |
After five years but within ten years | After five years but within ten years | | 186,164 | | | 189,078 | | After five years but within ten years | | 217,301 | | | 229,175 | |
After ten years | After ten years | | 1,662,302 | | | 1,700,743 | | After ten years | | 1,846,671 | | | 1,931,455 | |
| | $ | 1,867,358 | | | $ | 1,908,821 | | | $ | 2,097,114 | | | $ | 2,195,389 | |
December 31, 2018 (1) | | | | | |
December 31, 2019 (1) | | December 31, 2019 (1) | | | | |
Within one year | Within one year | | $ | — | | | $ | — | | Within one year | | $ | — | | | $ | — | |
After one year but within five years | After one year but within five years | | 19,714 | | | 19,423 | | After one year but within five years | | 22,136 | | | 22,207 | |
After five years but within ten years | After five years but within ten years | | 170,118 | | | 163,731 | | After five years but within ten years | | 194,197 | | | 194,376 | |
After ten years | After ten years | | 1,034,395 | | | 1,021,925 | | After ten years | | 1,693,150 | | | 1,728,331 | |
| | $ | 1,224,227 | | | $ | 1,205,079 | | | $ | 1,909,483 | | | $ | 1,944,914 | |
(1)Actual maturities could differ from contractual maturities.
The scheduled maturities of our held-to-maturity debt securities at SeptemberJune 30, 20192020 and December 31, 20182019 are presented in the table below:
| | | | Held to Maturity | | | | Held-to-Maturity | |
| | | Amortized | | Fair | | | Amortized | | Fair |
(Dollars in thousands) | (Dollars in thousands) | | Cost | | Value | (Dollars in thousands) | | Cost | | Value |
September 30, 2019 (1) | | | | | |
June 30, 2020 (1) | | June 30, 2020 (1) | | | | |
Within one year | Within one year | | $ | 2,659 | | | $ | 2,666 | | Within one year | | $ | 1,130 | | | $ | 1,131 | |
After one year but within five years | After one year but within five years | | 5,251 | | | 5,280 | | After one year but within five years | | 5,197 | | | 5,286 | |
After five years but within ten years | After five years but within ten years | | 32,696 | | | 33,345 | | After five years but within ten years | | 31,881 | | | 33,015 | |
After ten years | After ten years | | 94,355 | | | 96,971 | | After ten years | | 89,401 | | | 92,766 | |
| | $ | 134,961 | | | $ | 138,262 | | | $ | 127,609 | | | $ | 132,198 | |
December 31, 2018 (1) | | | | | |
December 31, 2019 (1) | | December 31, 2019 (1) | | | | |
Within one year | Within one year | | $ | 1,018 | | | $ | 1,016 | | Within one year | | $ | 2,649 | | | $ | 2,653 | |
After one year but within five years | After one year but within five years | | 6,703 | | | 6,701 | | After one year but within five years | | 4,239 | | | 4,270 | |
After five years but within ten years | After five years but within ten years | | 29,613 | | | 29,547 | | After five years but within ten years | | 35,288 | | | 35,967 | |
After ten years | After ten years | | 112,616 | | | 112,167 | | After ten years | | 91,425 | | | 93,735 | |
| | $ | 149,950 | | | $ | 149,431 | | | $ | 133,601 | | | $ | 136,625 | |
(1)Actual maturities could differ from contractual maturities.
Mortgage-backed securities (MBS) may have expected maturities that differ from their contractual maturities. These differences arise because issuers may have the right to call securities and borrowers may have the right to prepay obligations with or without prepayment penalty. The estimated weighted average duration of MBS was 1.3 years at June 30, 2020.
The held-to-maturity debt securities are not collateral-dependent securities as these are general obligation bonds issued by cities, states, counties, or other local and foreign governments.
Investment securities with fair market values aggregating $1.2$1.4 billion and $914.5 million$1.1 billion were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
During the ninesix months ended SeptemberJune 30, 2020, the Company sold $109.6 million of debt securities categorized as available-for-sale resulting in $2.6 million of realized gains and 0 realized losses. During the six months ended June 30, 2019, wethe Company sold $602.5 million of debt securities categorized as available for sale,available-for-sale, of which $578.8 million was related to the acquisition of Beneficial (see Note 3 for further information about the acquisition).Beneficial. The remaining $23.7 million resulted in realized gains of less than $0.1 million and 0 realized losses. During the nine months ended September 30, 2018, we sold $7.0 million of debt securities categorized as available for sale, resulting in realized gains of less than $0.1 million and 0 realized losses. The cost basis of all debt securities sales is based on the specific identification method.
During the nine months ended September 30, 2018, we sold $6.2 million of equity securities, specifically Visa Class B shares, resulting in realized gains of $3.8 million and 0 realized losses. There were 0 such sales during the nine months ended September 30, 2019.
As of SeptemberJune 30, 20192020 and December 31, 2018, our2019, the Company's debt securities portfolio had remaining unamortized premiums of $16.7$35.0 million and $12.7$15.1 million, respectively, and unaccreted discounts of $3.5 million and $2.5$4.1 million, respectively.
For debt securities with unrealized losses and an allowance has not been recorded, the table below shows ourthe gross unrealized losses and fair value by investment category and length of time that individual debt securities were in a continuous unrealized loss position at SeptemberJune 30, 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Duration of Unrealized Loss Position | | | | | | | | | | |
| | Less than 12 months | | | | 12 months or longer | | | | Total | | |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss |
Available-for-sale debt securities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
CMO | | $ | 22,506 | | | $ | 73 | | | $ | 8,135 | | | $ | 57 | | | $ | 30,641 | | | $ | 130 | |
FNMA MBS | | 138,397 | | | 919 | | | 6,920 | | | 97 | | | 145,317 | | | 1,016 | |
FHLMC MBS | | 31,148 | | | 230 | | | 2,941 | | | 31 | | | 34,089 | | | 261 | |
GNMA MBS | | 901 | | | 4 | | | 5,773 | | | 68 | | | 6,674 | | | 72 | |
Total temporarily impaired investments | | $ | 192,952 | | | $ | 1,226 | | | $ | 23,769 | | | $ | 253 | | | $ | 216,721 | | | $ | 1,479 | |
| | | | | | | | | | | | |
Held-to-maturity debt securities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign bonds (1) | | $ | 501 | | | $ | — | | | $ | — | | | $ | — | | | $ | 501 | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Duration of Unrealized Loss Position | | | | | | | | | | |
| | Less than 12 months | | | | 12 months or longer | | | | Total | | |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss |
Available-for-sale debt securities: | | | | | | | | | | | | |
CMO | | $ | 40,948 | | | $ | 89 | | | $ | — | | | $ | — | | | $ | 40,948 | | | $ | 89 | |
FNMA MBS | | 45,453 | | | 60 | | | 4,403 | | | 3 | | | 49,856 | | | 63 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
GSE | | 18,351 | | | 39 | | | — | | | — | | | 18,351 | | | 39 | |
Total | | $ | 104,752 | | | $ | 188 | | | $ | 4,403 | | | $ | 3 | | | $ | 109,155 | | | $ | 191 | |
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(1)Foreign bonds with an unrealized loss position
For debt securities with unrealized losses, the table below shows ourthe gross unrealized losses and fair value by investment category and length of time that individual debt securities were in a continuous unrealized loss position at December 31, 2018.2019.
| | | | Duration of Unrealized Loss Position | | | | | | | | Duration of Unrealized Loss Position | | | | | |
| | | Less than 12 months | | | 12 months or longer | | | Total | | | | Less than 12 months | | | 12 months or longer | | | Total | |
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(Dollars in thousands) | (Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss | (Dollars in thousands) | | Value | | Loss | | Value | | Loss | | Value | | Loss |
Available-for-sale debt securities: | Available-for-sale debt securities: | | | | | | | | | | | | | Available-for-sale debt securities: | | | | | | | | | | | | |
| CMO | CMO | | $ | 17,143 | | | $ | 40 | | | $ | 212,208 | | | $ | 6,798 | | | $ | 229,351 | | | $ | 6,838 | | CMO | | $ | 47,376 | | | $ | 481 | | | $ | 7,999 | | | $ | 61 | | | $ | 55,375 | | | $ | 542 | |
FNMA MBS | FNMA MBS | | 34,214 | | | 162 | | | 407,638 | | | 12,776 | | | 441,852 | | | 12,938 | | FNMA MBS | | 310,312 | | | 2,681 | | | 6,522 | | | 105 | | | 316,834 | | | 2,786 | |
FHLMC MBS | FHLMC MBS | | 16,025 | | | 21 | | | 76,469 | | | 2,373 | | | 92,494 | | | 2,394 | | FHLMC MBS | | 35,354 | | | 541 | | | 2,836 | | | 50 | | | 38,190 | | | 591 | |
GNMA MBS | GNMA MBS | | 5,837 | | | 79 | | | 21,805 | | | 801 | | | 27,642 | | | 880 | | GNMA MBS | | 1,847 | | | 4 | | | 5,742 | | | 59 | | | 7,589 | | | 63 | |
Total temporarily impaired investments | Total temporarily impaired investments | | $ | 73,219 | | | $ | 302 | | | $ | 718,120 | | | $ | 22,748 | | | $ | 791,339�� | | | $ | 23,050 | | Total temporarily impaired investments | | $ | 394,889 | | | $ | 3,707 | | | $ | 23,099 | | | $ | 275 | | | $ | 417,988 | | | $ | 3,982 | |
| Held-to-maturity debt securities: | Held-to-maturity debt securities: | | Held-to-maturity debt securities: | |
State and political subdivisions | | $ | 91,228 | | | $ | 155 | | | $ | 58,203 | | | $ | 639 | | | $ | 149,431 | | | $ | 794 | | |
| State and political subdivisions (1) | | State and political subdivisions (1) | | $ | 523 | | | $ | — | | | $ | — | | | $ | — | | | $ | 523 | | | $ | — | |
(1)State and political subdivisions with an unrealized loss position of less than twelve months had an unrealized loss of less than $1 thousand at December 31, 2019.
At SeptemberJune 30, 2019, we owned2020, available-for-sale debt securities totaling $217.2 million for which the amortized cost basis exceeded fair value.value totaled $109.2 million. Total unrealized losses on these securities were $1.5$0.2 million at SeptemberJune 30, 2019.2020. The temporary impairmentCompany does not have the intent to sell, nor is it more likely than not it will be required to sell these securities before it is able to recover the amortized cost basis. The unrealized losses are the result of changes in market interest rates subsequent to purchase. Our investmentpurchase, not credit loss, as these are highly rated agency securities with no expected credit loss, in the event of a default. As a result, there is no allowance for credit losses recorded for available-for-sale debt securities as of June 30, 2020.
At June 30, 2020, held-to-maturity debt securities had an amortized cost basis of $127.6 million. The held-to-maturity debt security portfolio is reviewed each quarter for indicationsprimarily consists of OTTI. This review includes analyzing the lengthhighly rated municipal bonds. The Company monitors credit quality of time and the extent to which the fair value has been lower thanits debt securities through credit ratings. The following table summarizes the amortized cost the financial condition and near-term prospectsof debt securities held-to-maturity as of June 30, 2020, aggregated by credit quality indicator:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | State and political subdivisions | | Foreign bonds |
AA-rated or higher | | $ | 126,683 | | | $ | 501 | |
BBB- | | 425 | | | — | |
Ending balance | | $ | 127,108 | | | $ | 501 | |
As a result of the issuer, including any specific events which may influenceadoption of ASC 326 on January 1, 2020, the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to holdCompany reviewed its held-to-maturity debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.
All debt securities, with the exception of 1 having a fair value of $0.4 million at September 30, 2019, were A-rated or better at the time of purchase and remained investment grade at September 30, 2019. All securities were evaluated for OTTI at September 30, 2019 and December 31, 2018. The result of this evaluation showed 0 OTTI as of September 30, 2019 or December 31, 2018. The estimated weighted average duration of MBS was 2.9 years at September 30, 2019.
7. LOANS
potential credit losses. The following table shows our loan and lease portfoliopresents the activity in the allowance for credit losses for debt securities held-to-maturity by category:
| | | | | | | | | | | | | | |
| | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Commercial and industrial | | $ | 2,116,654 | | | $ | 1,472,489 | |
Owner-occupied commercial | | 1,273,408 | | | 1,059,974 | |
Commercial mortgages | | 2,271,985 | | | 1,162,739 | |
Construction | | 514,402 | | | 316,566 | |
Commercial small business leases | | 169,697 | | | — | |
Residential(1) | | 1,051,551 | | | 218,099 | |
Consumer | | 1,138,873 | | | 680,939 | |
| | 8,536,570 | | | 4,910,806 | |
Less: | | | | |
Deferred fees, net | | 8,187 | | | 7,348 | |
Allowance for loan and lease losses | | 47,671 | | | 39,539 | |
Net loans and leases | | $ | 8,480,712 | | | $ | 4,863,919 | |
(1) Includes reverse mortgages at fair value of $17.7 million at Septembermajor security type for the six months ended June 30, 2019 and $16.5 million at December 31, 2018.
Upon the closing of the Beneficial acquisition on March 1, 2019, we acquired $37.0 million of credit impaired loans. The following table details the loans acquired from Beneficial that are accounted for in accordance with ASC 310-30, as of the date of the acquisition.2020:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | March 1, 2019State and political subdivisions | | Foreign bonds |
Contractual required principal and interest at acquisitionAllowance for credit losses: | | | | |
Beginning balance | | $ | 53,647— | | | $ | — | |
Contractual cash flows not expected to be collected (nonaccretable difference)Impact of adoption ASC 326 | | 20,1188 | | | — | |
Expected cash flows at acquisitionProvision for credit losses | | 33,529— | | | — | |
| | | | |
Interest component of expected cash flows (accretable yield)Charge-offs, net | | 3,068— | | | — | |
| | | | |
Fair value of acquired loans accounted for under ASC 310-30Ending balance | | $ | 30,4618 | | | $ | — | |
The following table shows the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the Company applies ASC 310-30Accrued interest receivable of $1.3 million as of June 30, 2020 for held-to-maturity debt securities was excluded from the dates indicated:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Outstanding principal balance | | $ | 45,326 | | | $ | 18,642 | |
Carrying amount | | 31,641 | | | 14,718 | |
Allowance for loan losses | | 175 | | | 227 | |
The following table presents the changes in accretable yield on the acquiredallowance for credit impaired loans for the three and nine months ended Septemberlosses. There were no nonaccrual or past due held-to-maturity debt securities as of June 30, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Balance at beginning of period | | $ | 4,055 | | | $ | 2,925 | | | $ | 2,463 | | | $ | 3,035 | |
Addition from Beneficial | | — | | | — | | | 3,068 | | | — | |
Accretion | | (507) | | | (433) | | | (1,581) | | | (1,351) | |
Reclassification from nonaccretable difference | | — | | | 2 | | | 207 | | | 1,080 | |
Additions/adjustments | | (52) | | | (52) | | | (661) | | | (322) | |
| | | | | | | | |
Balance at end of period | | $ | 3,496 | | | $ | 2,442 | | | $ | 3,496 | | | $ | 2,442 | |
2020.
8.Equity Investments
The following tables detail the amortized cost, and the estimated fair value of the Company's equity investments, which are included in Other investments in the unaudited Consolidated Statements of Financial Condition.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Equity Investments | | | | | | | | |
Visa Class B shares(1) | | $ | 618 | | | $ | 81 | | | $ | — | | | $ | 699 | |
Other equity investments(2) | | 11,158 | | | — | | | 1,646 | | | 9,512 | |
| | $ | 11,776 | | | $ | 81 | | | $ | 1,646 | | | $ | 10,211 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Equity Investments | | | | | | | | |
Visa Class B shares(1) | | $ | 15,716 | | | $ | 45,565 | | | $ | — | | | $ | 61,281 | |
Other equity investments(2) | | 8,140 | | | 625 | | | — | | | 8,765 | |
| | $ | 23,856 | | | $ | 46,190 | | | $ | — | | | $ | 70,046 | |
(1)The Company recorded net realized gain on sale of Visa Class B shares of $22.1 million during the three months ended June 30, 2020, which is recorded in Realized gain on equity investment, net in the Consolidated Statements of Income. The Company recorded unrealized gains on its remaining investment in Visa Class B shares of $0.1 million and $4.2 million during the six months ended June 30, 2020 and 2019, respectively which is recorded in Unrealized gain on equity investment, net in the Consolidated Statements of Income.
(2)The Company recorded an impairment loss of $2.3 million in the investment of Spring EQ during the six months ended June 30, 2020, which is recorded in Unrealized gain on equity investment, net in the Consolidated Statements of Income. There were 0 impairment losses recorded on the Company's equity investments during the six months ended June 30, 2019
6. LOANS
The following table shows the Company's loan and lease portfolio by category:
| | | | | | | | | | | | | | |
| | | | |
(Dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Commercial and industrial(1) | | $ | 2,953,701 | | | $ | 2,046,798 | |
Owner-occupied commercial | | 1,337,253 | | | 1,296,466 | |
Commercial mortgages | | 2,165,547 | | | 2,222,976 | |
Construction | | 638,504 | | | 581,082 | |
Commercial small business leases | | 213,133 | | | 188,630 | |
Residential(2) | | 910,971 | | | 1,016,500 | |
Consumer(3) | | 1,133,371 | | | 1,128,731 | |
| | 9,352,480 | | | 8,481,183 | |
Less: | | | | |
Deferred fees, net(4) | | — | | | 9,143 | |
Allowance for credit losses | | 232,192 | | | 47,576 | |
Net loans and leases | | $ | 9,120,288 | | | $ | 8,424,464 | |
(1) Includes PPP loans of $945.1 million at June 30, 2020.
(2) Includes reverse mortgages at fair value of $16.1 million at June 30, 2020 and $16.6 million at December 31, 2019.
(3) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(4) At June 30, 2020, deferred fees, net are included in portfolio segment totals to present the amortized cost basis in accordance with the adoption of CECL. At December 31, 2019, deferred fees, net are excluded from portfolio segment totals to present the unpaid principal balance under the incurred loss methodology.
Accrued interest receivable on loans and leases was $46.6 million and $31.5 million at June 30, 2020 and December 31, 2019, respectively. Accrued interest receivable on loans and leases was excluded from the allowance for credit losses.
7. ALLOWANCE FOR LOAN AND LEASECREDIT LOSSES AND CREDIT QUALITY INFORMATION
Allowance for Loan Losses
We maintain anThe following table provides the activity of allowance for credit losses and loan losses which represents our best estimate of probable losses in our loan portfolio. As losses are realized, they are charged to this allowance. We established our allowance in accordance with guidance provided inbalances for the SEC’s Staff Accounting Bulletin 102 (SAB 102), Selected Loan Loss Allowance Methodologythree and Documentation Issues, ASC 450, Contingencies and ASC 310, Receivables. When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation ofsix months ended June 30, 2020 under the allowance is assignedCECL model in accordance with ASC 310-10. We also maintain an326 (as adopted on January 1, 2020):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial(1) | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer(3) | | Total |
Three months ended June 30, 2020 | | | | | | | | | | | | | | |
Allowance for credit losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 65,771 | | | $ | 9,541 | | | $ | 26,600 | | | $ | 5,198 | | | $ | 11,593 | | | $ | 20,370 | | | $ | 139,073 | |
| | | | | | | | | | | | | | |
Charge-offs | | (2,072) | | | (53) | | | — | | | — | | | (32) | | | (667) | | | (2,824) | |
Recoveries | | 968 | | | — | | | 3 | | | — | | | 24 | | | 194 | | | 1,189 | |
Provision (credit) | | 79,558 | | | (532) | | | 11,794 | | | 4,928 | | | (2,414) | | | 1,420 | | | 94,754 | |
Ending balance | | $ | 144,225 | | | $ | 8,956 | | | $ | 38,397 | | | $ | 10,126 | | | $ | 9,171 | | | $ | 21,317 | | | $ | 232,192 | |
Six months ended June 30, 2020 | | | | | | | | | | | | | | |
Allowance for credit losses | | | | | | | | | | | | | | |
Beginning balance, prior to adoption of ASC 326 | | $ | 22,849 | | | $ | 4,616 | | | $ | 7,452 | | | $ | 3,891 | | | $ | 1,381 | | | $ | 7,387 | | | $ | 47,576 | |
Impact of adopting ASC 326(4) | | 19,747 | | | (1,472) | | | 1,662 | | | 681 | | | 7,522 | | | 7,715 | | | 35,855 | |
Charge-offs | | (5,136) | | | (336) | | | (51) | | | — | | | (175) | | | (1,581) | | | (7,279) | |
Recoveries | | 3,815 | | | 125 | | | 32 | | | 5 | | | 115 | | | 548 | | | 4,640 | |
Provision (credit) | | 102,950 | | | 6,023 | | | 29,302 | | | 5,549 | | | 328 | | | 7,248 | | | 151,400 | |
Ending balance | | $ | 144,225 | | | $ | 8,956 | | | $ | 38,397 | | | $ | 10,126 | | | $ | 9,171 | | | $ | 21,317 | | | $ | 232,192 | |
Period-end allowance allocated to: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 18 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 18 | |
Loans evaluated on a collective basis | | 144,207 | | | 8,956 | | | 38,397 | | | 10,126 | | | 9,171 | | | 21,317 | | | 232,174 | |
| | | | | | | | | | | | | | |
Ending balance | | $ | 144,225 | | | $ | 8,956 | | | $ | 38,397 | | | $ | 10,126 | | | $ | 9,171 | | | $ | 21,317 | | | $ | 232,192 | |
Period-end loan balances: | | | | | | | | | | | | | | |
Loans evaluated on an individual basis | | $ | 15,634 | | | $ | 5,425 | | | $ | 4,470 | | | $ | 88 | | | $ | 5,452 | | | $ | 2,464 | | | $ | 33,533 | |
Loans evaluated on a collective basis | | 3,151,200 | | | 1,331,828 | | | 2,161,077 | | | 638,416 | | | 889,408 | | | 1,130,907 | | | 9,302,836 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Ending balance | | $ | 3,166,834 | | | $ | 1,337,253 | | | $ | 2,165,547 | | | $ | 638,504 | | | $ | 894,860 | | | $ | 1,133,371 | | | $ | 9,336,369 | |
(1)Includes commercial small business leases and PPP loans.
(2)Period-end loan balance excludes reverse mortgages at fair value of $16.1 million.
(3)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(4)The impact of adopting ASC 326 includes $0.1 million for the initial allowance for loan losses on acquired loans: (i) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remainingpurchased with credit discount recorded at the time of acquisition and (ii) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based on a continuous review of these portfolios. The following are included in our allowance for loan losses:
•Specific reserves for impaired loansdeterioration.
•An allowance for each pool of homogeneous loans based on historical loss experience
•
Adjustments for qualitative and environmental factors allocated to pools of homogeneous loans
When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, as necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. Loans are charged off when they are deemed to be uncollectible. During the nine months ended September 30, 2019 and 2018, net charge-offs totaled $15.8 million, or 0.27%, of average loans annualized, and $8.7 million, or 0.24%, of average loans annualized, respectively.
Allowance for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied commercial, commercial mortgages and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. The probability of default is calculated based on the historical rate of migration to impaired status during the last 35 quarters. During the nine months ended September 30, 2019, we increased the look-back period to 35 quarters from 32 quarters used at December 31, 2018. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the quantitative reserves calculated by the allowance for loan loss model are adequately considering the losses within a full credit cycle. Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 35 quarter look-back period.
Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration:
•Current underwriting policies, staff, and portfolio mix,
•Internal trends of delinquency, nonaccrual and criticized loans by segment,
•Risk rating accuracy, control and regulatory assessments/environment,
•General economic conditions - locally and nationally,
•Market trends impacting collateral values, and
•Competitive environment, as it could impact loan structure and underwriting.
The above factors are based on their relative standing compared to the period in which historic losses are used in quantitative reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from quantitative reserves.
The allowance methodology uses a loss emergence period (LEP), which isfollowing table provides the periodactivity of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 8.89 quarters as of September 30, 2019. Our residential mortgage and consumer LEP estimate remains at four quarters as of September 30, 2019. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP annually for our commercial portfolio and review the current four quarter LEP for the retail portfolio to determine the continued reasonableness of this assumption.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.
The following tables provide the activity of our allowance for loanlease losses and loan balances for the three and ninesix months ended SeptemberJune 30, 2019:2019 under the incurred loss model:
| (Dollars in thousands) | (Dollars in thousands) | | Commercial and Industrial(1) | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer | | Total | (Dollars in thousands) | | Commercial and Industrial(1) | | Owner - occupied Commercial | | Commercial Mortgages | | Construction | | Residential(2) | | Consumer | | Total |
Three months ended September 30, 2019 | | | | | | | | | | | | | | | |
Allowance for loan losses | | |
Three months ended June 30, 2019 | | Three months ended June 30, 2019 | | | | | | | | | | | | | | |
Allowance for loan and lease losses | | Allowance for loan and lease losses | |
Beginning balance | Beginning balance | | $ | 22,004 | | | $ | 4,480 | | | $ | 6,544 | | | $ | 2,984 | | | $ | 1,358 | | | $ | 7,994 | | | $ | 45,364 | | Beginning balance | | $ | 21,016 | | | $ | 4,949 | | | $ | 6,679 | | | $ | 4,044 | | | $ | 1,401 | | | $ | 8,232 | | | $ | 46,321 | |
Charge-offs | Charge-offs | | (1,441) | | | (12) | | | 2 | | | — | | | (3) | | | (1,042) | | | (2,496) | | Charge-offs | | (13,002) | | | (8) | | | (153) | | | (42) | | | (163) | | | (960) | | | (14,328) | |
Recoveries | Recoveries | | 297 | | | 4 | | | 120 | | | 2 | | | (60) | | | 319 | | | 682 | | Recoveries | | 203 | | | 78 | | | 398 | | | 1 | | | (2) | | | 498 | | | 1,176 | |
Provision (credit) | Provision (credit) | | 3,595 | | | 23 | | | 97 | | | (105) | | | 43 | | | 327 | | | 3,980 | | Provision (credit) | | 13,568 | | | (526) | | | (474) | | | (1,013) | | | 24 | | | 72 | | | 11,651 | |
Provision (credit) for acquired loans | Provision (credit) for acquired loans | | 49 | | | 9 | | | (26) | | | — | | | (8) | | | 117 | | | 141 | | Provision (credit) for acquired loans | | 219 | | | (13) | | | 94 | | | (6) | | | 98 | | | 152 | | | 544 | |
Ending balance | Ending balance | | $ | 24,504 | | | $ | 4,504 | | | $ | 6,737 | | | $ | 2,881 | | | $ | 1,330 | | | $ | 7,715 | | | $ | 47,671 | | Ending balance | | $ | 22,004 | | | $ | 4,480 | | | $ | 6,544 | | | $ | 2,984 | | | $ | 1,358 | | | $ | 7,994 | | | $ | 45,364 | |
Nine months ended September 30, 2019 | | | | | | | | | | | | | | | |
Six months ended June 30, 2019 | | Six months ended June 30, 2019 | | | | | | | | | | | | | | |
Allowance for loan losses | Allowance for loan losses | | Allowance for loan losses | |
Beginning balance | Beginning balance | | $ | 14,211 | | | $ | 5,057 | | | $ | 6,806 | | | $ | 3,712 | | | $ | 1,428 | | | $ | 8,325 | | | $ | 39,539 | | Beginning balance | | $ | 14,211 | | | $ | 5,057 | | | $ | 6,806 | | | $ | 3,712 | | | $ | 1,428 | | | $ | 8,325 | | | $ | 39,539 | |
Charge-offs | Charge-offs | | (15,185) | | | (20) | | | (153) | | | (42) | | | (288) | | | (2,686) | | | (18,374) | | Charge-offs | | (13,744) | | | (8) | | | (155) | | | (42) | | | (285) | | | (1,644) | | | (15,878) | |
Recoveries | Recoveries | | 858 | | | 85 | | | 547 | | | 4 | | | (76) | | | 1,118 | | | 2,536 | | Recoveries | | 561 | | | 81 | | | 427 | | | 2 | | | (16) | | | 799 | | | 1,854 | |
Provision (credit) | Provision (credit) | | 24,286 | | | (614) | | | (533) | | | (787) | | | 118 | | | 656 | | | 23,126 | | Provision (credit) | | 20,691 | | | (637) | | | (630) | | | (682) | | | 75 | | | 329 | | | 19,146 | |
Provision (credit) for acquired loans | Provision (credit) for acquired loans | | 334 | | | (4) | | | 70 | | | (6) | | | 148 | | | 302 | | | 844 | | Provision (credit) for acquired loans | | 285 | | | (13) | | | 96 | | | (6) | | | 156 | | | 185 | | | 703 | |
Ending balance | Ending balance | | $ | 24,504 | | | $ | 4,504 | | | $ | 6,737 | | | $ | 2,881 | | | $ | 1,330 | | | $ | 7,715 | | | $ | 47,671 | | Ending balance | | $ | 22,004 | | | $ | 4,480 | | | $ | 6,544 | | | $ | 2,984 | | | $ | 1,358 | | | $ | 7,994 | | | $ | 45,364 | |
Period-end allowance allocated to: | Period-end allowance allocated to: | | | | | | | | | | | | | | | Period-end allowance allocated to: | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 3,534 | | | $ | 156 | | | $ | — | | | $ | — | | | $ | 478 | | | $ | 180 | | | $ | 4,348 | | |
Loans collectively evaluated for impairment | | 20,969 | | | 4,269 | | | 6,690 | | | 2,873 | | | 813 | | | 7,534 | | | 43,148 | | |
Individually evaluated for impairment | | Individually evaluated for impairment | | $ | 4,324 | | | $ | — | | | $ | — | | | $ | — | | | $ | 488 | | | $ | 183 | | | $ | 4,995 | |
Collectively evaluated for impairment | | Collectively evaluated for impairment | | 17,679 | | | 4,401 | | | 6,496 | | | 2,976 | | | 828 | | | 7,810 | | | 40,190 | |
Acquired loans individually evaluated for impairment | Acquired loans individually evaluated for impairment | | 1 | | | 79 | | | 47 | | | 8 | | | 39 | | | 1 | | | 175 | | Acquired loans individually evaluated for impairment | | 1 | | | 79 | | | 48 | | | 8 | | | 42 | | | 1 | | | 179 | |
Ending balance | Ending balance | | $ | 24,504 | | | $ | 4,504 | | | $ | 6,737 | | | $ | 2,881 | | | $ | 1,330 | | | $ | 7,715 | | | $ | 47,671 | | Ending balance | | $ | 22,004 | | | $ | 4,480 | | | $ | 6,544 | | | $ | 2,984 | | | $ | 1,358 | | | $ | 7,994 | | | $ | 45,364 | |
Period-end loan balances: | Period-end loan balances: | | | | | | | | | | | | | | | Period-end loan balances: | | | | | | | | | | | | | | |
Loans individually evaluated for impairment(3) | | $ | 21,135 | | | $ | 9,263 | | | $ | 2,325 | | | $ | — | | | $ | 12,031 | | | $ | 7,502 | | | $ | 52,256 | | |
Loans collectively evaluated for impairment | | 1,657,748 | | | 935,306 | | | 1,019,723 | | | 375,664 | | | 138,121 | | | 887,193 | | | 5,013,755 | | |
Individually evaluated for impairment(2) | | Individually evaluated for impairment(2) | | $ | 21,171 | | | $ | 8,753 | | | $ | 2,431 | | | $ | — | | | $ | 11,398 | | | $ | 7,383 | | | $ | 51,136 | |
Collectively evaluated for impairment | | Collectively evaluated for impairment | | 1,575,810 | | | 1,168,864 | | | 765,268 | | | 324,307 | | | 134,235 | | | 848,396 | | | 4,816,880 | |
Acquired nonimpaired loans | Acquired nonimpaired loans | | 605,804 | | | 322,030 | | | 1,237,282 | | | 138,251 | | | 876,089 | | | 241,633 | | | 3,421,089 | | Acquired nonimpaired loans | | 738,579 | | | 99,326 | | | 1,464,739 | | | 216,843 | | | 912,288 | | | 267,955 | | | 3,699,730 | |
Acquired impaired loans | Acquired impaired loans | | 1,664 | | | 6,809 | | | 12,655 | | | 487 | | | 7,655 | | | 2,545 | | | 31,815 | | Acquired impaired loans | | 4,964 | | | 3,951 | | | 13,609 | | | 546 | | | 7,863 | | | 2,999 | | | 33,932 | |
Ending balance(4)(3) | Ending balance(4)(3) | | $ | 2,286,351 | | | $ | 1,273,408 | | | $ | 2,271,985 | | | $ | 514,402 | | | $ | 1,033,896 | | | $ | 1,138,873 | | | $ | 8,518,915 | | Ending balance(4)(3) | | $ | 2,340,524 | | | $ | 1,280,894 | | | $ | 2,246,047 | | | $ | 541,696 | | | $ | 1,065,784 | | | $ | 1,126,733 | | | $ | 8,601,678 | |
(1)Includes commercial small business leases.
(2)Period-end loan balance excludes reverse mortgages at fair value of $17.7$15.9 million.
(3)The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $14.1$14.2 million for the period ending SeptemberJune 30, 2019. Accruing troubled debt restructured loans are considered impaired loans.
(4)Ending loan balances do not include net deferred fees.
The following table providesshows nonaccrual and past due loans presented at amortized cost at the activity ofdate indicated under the allowance for loan losses and loan balances for the three and nine months ended September 30, 2018:CECL model:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and Industrial | | Owner - occupied Commercial | | Commercial Mortgages | | Construction | | Residential(1) | | Consumer | | Total |
Three months ended September 30, 2018 | | | | | | | | | | | | | | |
Allowance for loan losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 15,842 | | | $ | 5,284 | | | $ | 6,951 | | | $ | 3,289 | | | $ | 1,519 | | | $ | 8,152 | | | $ | 41,037 | |
Charge-offs | | (1,761) | | | — | | | — | | | (1,475) | | | — | | | (567) | | | (3,803) | |
Recoveries | | 621 | | | 16 | | | 52 | | | 1 | | | 28 | | | 144 | | | 862 | |
Provision (credit) | | 1,947 | | | 273 | | | (598) | | | 1,657 | | | (71) | | | 626 | | | 3,834 | |
Provision (credit) for acquired loans | | (82) | | | — | | | (21) | | | — | | | (1) | | | (14) | | | (118) | |
Ending balance | | $ | 16,567 | | | $ | 5,573 | | | $ | 6,384 | | | $ | 3,472 | | | $ | 1,475 | | | $ | 8,341 | | | $ | 41,812 | |
Nine months ended September 30, 2018 | | | | | | | | | | | | | | |
Allowance for loan losses | | | | | | | | | | | | | | |
Beginning balance | | $ | 16,732 | | | $ | 5,422 | | | $ | 5,891 | | | $ | 2,861 | | | $ | 1,798 | | | $ | 7,895 | | | $ | 40,599 | |
Charge-offs | | (6,861) | | | (351) | | | (48) | | | (1,475) | | | (54) | | | (1,857) | | | (10,646) | |
Recoveries | | 1,060 | | | 28 | | | 189 | | | 3 | | | 117 | | | 598 | | | 1,995 | |
Provision (credit) | | 5,730 | | | 419 | | | 356 | | | 2,106 | | | (382) | | | 1,711 | | | 9,940 | |
Provision (credit) for acquired loans | | (94) | | | 55 | | | (4) | | | (23) | | | (4) | | | (6) | | | (76) | |
Ending balance | | $ | 16,567 | | | $ | 5,573 | | | $ | 6,384 | | | $ | 3,472 | | | $ | 1,475 | | | $ | 8,341 | | | $ | 41,812 | |
Period-end allowance allocated to: | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 3,970 | | | $ | 9 | | | $ | — | | | $ | 444 | | | $ | 570 | | | $ | 171 | | | $ | 5,164 | |
Loans collectively evaluated for impairment | | 12,517 | | | 5,546 | | | 6,300 | | | 3,019 | | | 870 | | | 8,167 | | | 36,419 | |
Acquired loans individually evaluated for impairment | | 80 | | | 18 | | | 84 | | | 9 | | | 35 | | | 3 | | | 229 | |
Ending balance | | $ | 16,567 | | | $ | 5,573 | | | $ | 6,384 | | | $ | 3,472 | | | $ | 1,475 | | | $ | 8,341 | | | $ | 41,812 | |
Period-end loan balances: | | | | | | | | | | | | | | |
Loans individually evaluated for impairment(2) | | $ | 19,910 | | | $ | 2,829 | | | $ | 6,502 | | | $ | 2,903 | | | $ | 11,479 | | | $ | 8,256 | | | $ | 51,879 | |
Loans collectively evaluated for impairment | | 1,387,143 | | | 958,356 | | | 961,345 | | | 322,822 | | | 134,074 | | | 620,727 | | | 4,384,467 | |
Acquired nonimpaired loans | | 97,552 | | | 119,403 | | | 156,483 | | | 7,025 | | | 60,407 | | | 24,568 | | | 465,438 | |
Acquired impaired loans | | 2,070 | | | 4,816 | | | 8,951 | | | 737 | | | 766 | | | 153 | | | 17,493 | |
Ending balance(3) | | $ | 1,506,675 | | | $ | 1,085,404 | | | $ | 1,133,281 | | | $ | 333,487 | | | $ | 206,726 | | | $ | 653,704 | | | $ | 4,919,277 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2020 | | | | | | | | | | | | |
(Dollars in thousands) | | | | 30–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Nonaccrual Loans(1) | | | | Total Loans |
Commercial and industrial(2) | | | | $ | 7,577 | | | $ | 1,080 | | | $ | 8,657 | | | $ | 3,142,796 | | | $ | 15,381 | | | | | $ | 3,166,834 | |
Owner-occupied commercial | | | | 5,198 | | | 197 | | | 5,395 | | | 1,327,646 | | | 4,212 | | | | | 1,337,253 | |
Commercial mortgages | | | | 7,895 | | | 996 | | | 8,891 | | | 2,155,508 | | | 1,148 | | | | | 2,165,547 | |
Construction | | | | — | | | — | | | — | | | 638,504 | | | — | | | | | 638,504 | |
Residential(3) | | | | 1,504 | | | 175 | | | 1,679 | | | 890,063 | | | 3,118 | | | | | 894,860 | |
Consumer(4) | | | | 5,473 | | | 6,153 | | | 11,626 | | | 1,119,429 | | | 2,316 | | | | | 1,133,371 | |
Total | | | | $ | 27,647 | | | $ | 8,601 | | | $ | 36,248 | | | $ | 9,273,946 | | | $ | 26,175 | | | | | $ | 9,336,369 | |
% of Total Loans | | | | 0.30 | % | | 0.09 | % | | 0.39 | % | | 99.33 | % | | 0.28 | % | | | | 100 | % |
(1)Period-end loan balanceNonaccrual loans with an allowance totaled $16 thousand.
(2)Includes commercial small business leases and PPP loans.
(3)Residential accruing current balances excludes reverse mortgages at fair value of $16.6$16.1 million.
(2)(4)The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loansIncludes $10.5 million of $15.2 million for the period ending September 30, 2018. Accruing troubled debt restructured loans are considered impaired loans.
(3)Ending loan balances do not include net deferred fees.
Nonaccrual and Past Due Loans
Nonaccruing loans are those on which the accrual of interest has ceased. Typically, we discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. Interest accrueddelinquent, but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the accretion of net deferred loan fees and amortization of net deferred loan costs 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 our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing, are defined asU.S. government-guaranteed student 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 are in the processthat carry little risk of collection.credit loss.
The following tables show ourtable shows nonaccrual and past due loans presented at unpaid principal balance at the dates indicated:date indicated under the incurred loss model:
| | | September 30, 2019 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | 30–59 Days Past Due and Still Accruing | | 60–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Acquired Impaired Loans | | Nonaccrual Loans | | Total Loans | (Dollars in thousands) | | 30–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Acquired Impaired Loans | | Nonaccrual Loans | | Total Loans |
Commercial and industrial(1) | Commercial and industrial(1) | | $ | 7,665 | | | $ | 640 | | | $ | 528 | | | $ | 8,833 | | | $ | 2,254,847 | | | $ | 1,664 | | | $ | 21,007 | | | $ | 2,286,351 | | Commercial and industrial(1) | | $ | 6,289 | | | $ | 2,038 | | | $ | 8,327 | | | $ | 2,214,506 | | | $ | 1,564 | | | $ | 11,031 | | | $ | 2,235,428 | |
Owner-occupied commercial | Owner-occupied commercial | | 2,183 | | | 1,390 | | | — | | | 3,573 | | | 1,253,763 | | | 6,809 | | | 9,263 | | | 1,273,408 | | Owner-occupied commercial | | 1,498 | | | 831 | | | 2,329 | | | 1,283,320 | | | 6,757 | | | 4,060 | | | 1,296,466 | |
Commercial mortgages | Commercial mortgages | | 5,900 | | | 950 | | | 989 | | | 7,839 | | | 2,249,294 | | | 12,655 | | | 2,197 | | | 2,271,985 | | Commercial mortgages | | 4,999 | | | 99 | | | 5,098 | | | 2,207,582 | | | 8,670 | | | 1,626 | | | 2,222,976 | |
Construction | Construction | | 1,020 | | | — | | | — | | | 1,020 | | | 512,895 | | | 487 | | | — | | | 514,402 | | Construction | | — | | | — | | | — | | | 580,591 | | | 491 | | | — | | | 581,082 | |
Residential(2) | Residential(2) | | 7,475 | | | 758 | | | 248 | | | 8,481 | | | 1,013,608 | | | 7,655 | | | 4,152 | | | 1,033,896 | | Residential(2) | | 6,733 | | | 437 | | | 7,170 | | | 980,893 | | | 7,326 | | | 4,490 | | | 999,879 | |
Consumer(3) | Consumer(3) | | 8,152 | | | 3,104 | | | 11,944 | | | 23,200 | | | 1,111,329 | | | 2,545 | | | 1,799 | | | 1,138,873 | | Consumer(3) | | 13,164 | | | 12,745 | | | 25,909 | | | 1,098,980 | | | 2,127 | | | 1,715 | | | 1,128,731 | |
Total(4)(3) | Total(4)(3) | | $ | 32,395 | | | $ | 6,842 | | | $ | 13,709 | | | $ | 52,946 | | | $ | 8,395,736 | | | $ | 31,815 | | | $ | 38,418 | | | $ | 8,518,915 | | Total(4)(3) | | $ | 32,683 | | | $ | 16,150 | | | $ | 48,833 | | | $ | 8,365,872 | | | $ | 26,935 | | | $ | 22,922 | | | $ | 8,464,562 | |
% of Total Loans | % of Total Loans | | 0.38 | % | | 0.08 | % | | 0.16 | % | | 0.62 | % | | 98.55 | % | | 0.37 | % | | 0.45 | % | | 100 | % | % of Total Loans | | 0.39 | % | | 0.19 | % | | 0.58 | % | | 98.83 | % | | 0.32 | % | | 0.27 | % | | 100 | % |
(1)Includes commercial small business leases.
(2)Residential accruing current balances excludes reverse mortgages, at fair value of $17.7$16.6 million.
(3)Includes $18.8$22.3 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss.
(4)The balancesBalances in the table above include a total of $3.4$3.2 billion acquired non-impaired loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | | | | | | | |
(Dollars in thousands) | | 30–59 Days Past Due and Still Accruing | | 60–89 Days Past Due and Still Accruing | | Greater Than 90 Days Past Due and Still Accruing | | Total Past Due And Still Accruing | | Accruing Current Balances | | Acquired Impaired Loans | | Nonaccrual Loans | | Total Loans |
Commercial and industrial | | $ | 3,653 | | | $ | 993 | | | $ | 71 | | | $ | 4,717 | | | $ | 1,452,185 | | | $ | 1,531 | | | $ | 14,056 | | | $ | 1,472,489 | |
Owner-occupied commercial | | 733 | | | 865 | | | — | | | 1,598 | | | 1,049,722 | | | 4,248 | | | 4,406 | | | 1,059,974 | |
Commercial mortgages | | 1,388 | | | 908 | | | — | | | 2,296 | | | 1,148,988 | | | 7,504 | | | 3,951 | | | 1,162,739 | |
Construction | | 157 | | | — | | | — | | | 157 | | | 312,879 | | | 749 | | | 2,781 | | | 316,566 | |
Residential(1) | | 1,970 | | | 345 | | | 660 | | | 2,975 | | | 194,960 | | | 761 | | | 2,854 | | | 201,550 | |
Consumer | | 525 | | | 971 | | | 104 | | | 1,600 | | | 677,182 | | | 151 | | | 2,006 | | | 680,939 | |
Total(2) | | $ | 8,426 | | | $ | 4,082 | | | $ | 835 | | | $ | 13,343 | | | $ | 4,835,916 | | | $ | 14,944 | | | $ | 30,054 | | | $ | 4,894,257 | |
% of Total Loans | | 0.17 | % | | 0.08 | % | | 0.02 | % | | 0.27 | % | | 98.81 | % | | 0.31 | % | | 0.61 | % | | 100 | % |
The following table presents the amortized cost basis of nonaccruing collateral-dependent loans by class at June 30, 2020 under the CECL model: | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | |
(Dollars in thousands) | | Property | | | | Equipment and other |
Commercial and industrial(1) | | $ | 11,008 | | | | | $ | 4,373 | |
Owner-occupied commercial | | 4,212 | | | | | — | |
Commercial mortgages | | 1,148 | | | | | — | |
Construction | | — | | | | | — | |
Residential(2) | | 3,118 | | | | | — | |
Consumer(3) | | 2,316 | | | | | — | |
Total | | $ | 21,802 | | | | | $ | 4,373 | |
(1)Residential accruing current balances excludesIncludes commercial small business leases.
(2)Excludes reverse mortgages at fair value of $16.5 million.value.
(2)(3)The balances above include a totalIncludes home equity lines of $430.0 million acquired non-impairedcredit, installment loans, unsecured lines of credit and education loans.
Impaired Loans
Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and ASC 310. The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the fair value of the collateral if the loan is collateral dependent or (3) the loan’s observable market price. If the measure of the impaired loan is less than the recorded investment in the loan, a related allowance is allocated for the impairment.
The following tables providetable provides an analysis of ourthe Company's impaired loans at September 30, 2019 and December 31, 2018:2019 under the incurred loss model:
| | | September 30, 2019 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | Ending Loan Balances | | Loans with No Related Reserve(1) | | Loans with Related Reserve(2) | | Related Reserve | | Contractual Principal Balances(2) | | Average Loan Balances | (Dollars in thousands) | | Ending Loan Balances | | Loans with No Related Reserve(1) | | Loans with Related Reserve(2) | | Related Reserve | | Contractual Principal Balances(2) | | Average Loan Balances |
Commercial and industrial | Commercial and industrial | | $ | 21,138 | | | $ | 8,666 | | | $ | 12,472 | | | $ | 3,534 | | | $ | 25,423 | | | $ | 18,695 | | Commercial and industrial | | $ | 11,900 | | | $ | 9,979 | | | $ | 1,921 | | | $ | 1,185 | | | $ | 14,653 | | | $ | 17,033 | |
Owner-occupied commercial | Owner-occupied commercial | | 10,559 | | | 9,107 | | | 1,452 | | | 235 | | | 10,913 | | | 7,650 | | Owner-occupied commercial | | 5,596 | | | 3,919 | | | 1,677 | | | 233 | | | 6,083 | | | 7,869 | |
Commercial mortgages | Commercial mortgages | | 3,130 | | | 2,325 | | | 805 | | | 47 | | | 7,381 | | | 5,251 | | Commercial mortgages | | 4,888 | | | 1,753 | | | 3,135 | | | 65 | | | 5,215 | | | 4,607 | |
Construction | Construction | | 487 | | | — | | | 487 | | | 8 | | | 561 | | | 2,226 | | Construction | | 435 | | | — | | | 435 | | | 24 | | | 488 | | | 1,686 | |
Residential | Residential | | 12,214 | | | 8,320 | | | 3,894 | | | 517 | | | 14,391 | | | 11,546 | | Residential | | 14,119 | | | 8,858 | | | 5,261 | | | 557 | | | 16,721 | | | 12,031 | |
Consumer | Consumer | | 7,531 | | | 6,198 | | | 1,333 | | | 182 | | | 8,262 | | | 7,870 | | Consumer | | 7,584 | | | 5,876 | | | 1,708 | | | 178 | | | 8,444 | | | 7,729 | |
Total | Total | | $ | 55,059 | | | $ | 34,616 | | | $ | 20,443 | | | $ | 4,523 | | | $ | 66,931 | | | $ | 53,238 | | Total | | $ | 44,522 | | | $ | 30,385 | | | $ | 14,137 | | | $ | 2,242 | | | $ | 51,604 | | | $ | 50,955 | |
(1)Reflects loan balances at or written down to their remaining book balance.
(2)The above includes acquired impaired loans totaling $2.8$7.9 million in the ending loan balance and $3.1 million in the contractual principal balance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | | | |
(Dollars in thousands) | | Ending Loan Balances | | Loans with No Related Reserve(1) | | Loans with Related Reserve(2) | | Related Reserve | | Contractual Principal Balances(2) | | Average Loan Balances |
Commercial and industrial | | $ | 14,841 | | | $ | 8,625 | | | $ | 6,216 | | | $ | 878 | | | $ | 22,365 | | | $ | 18,484 | |
Owner-occupied commercial | | 6,065 | | | 4,406 | | | 1,659 | | | 92 | | | 6,337 | | | 5,378 | |
Commercial mortgages | | 5,679 | | | 4,083 | | | 1,596 | | | 79 | | | 15,372 | | | 7,438 | |
Construction | | 3,530 | | | — | | | 3,530 | | | 458 | | | 5,082 | | | 5,091 | |
Residential | | 11,321 | | | 6,442 | | | 4,879 | | | 581 | | | 13,771 | | | 12,589 | |
Consumer | | 7,916 | | | 6,899 | | | 1,017 | | | 170 | | | 8,573 | | | 7,956 | |
Total | | $ | 49,352 | | | $ | 30,455 | | | $ | 18,897 | | | $ | 2,258 | | | $ | 71,500 | | | $ | 56,936 | |
(1)Reflects loan balances at or written down to their remaining book balance.
(2)The above includes acquired impaired loans totaling $4.3 million in the ending loan balance and $4.8$9.0 million in the contractual principal balance.
Interest income of $0.2 million and $0.4 million was recognized on individually reviewed loans during the three and six months ended June 30, 2020. Interest income of $0.4 million and $0.6 million was recognized on impaired loans during the three and ninesix months ended SeptemberJune 30, 2019, respectively. Interest income of $0.6 million and $1.3 million was recognized on impaired loans during the three and nine months ended September 30, 2018, respectively.2019.
As of SeptemberJune 30, 2019,2020, there were 4025 residential loans and 3220 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $4.2$2.0 million and $11.3$6.2 million, respectively. As of December 31, 2018,2019, there were 2633 residential loans and 1129 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $1.9$3.2 million and $5.3$9.5 million, respectively.
Reserves on Acquired Nonimpaired Loans
In accordance with ASC 310, loans acquired by Loan workout and OREO expenses were $1.1 million and $1.8 million during the Bank through its mergers with First National Bank of Wyoming, Alliance Bancorp, Inc. (Alliance), Penn Liberty Bank (Penn Liberty)three and Beneficialsix months ended June 30, 2020, respectively, and $1.1 million and $1.3 million during three and six months ended June 30, 2019, respectively. Loan workout and OREO expenses are reflectedincluded in Loan workout and other credit costs on the balance sheet at their fair values on the dateConsolidated Statement of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date, the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance.
Income.
Credit Quality Indicators
Below is a description of each of ourthe risk ratings for all commercial loans:
•Pass. These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible.
•Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.
•Substandard or Lower. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. A distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected.
•Doubtful. Borrowers In addition, some borrowers in this category could have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.
•Loss. Loans are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.
Residential and Consumer Loans
The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.
The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the Allowanceallowance for Loan Loss.credit losses, as of June 30, 2020 under the CECL model.
Commercial Credit Exposure
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | | | | | | | | | |
| | Commercial and Industrial(1) | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Total Commercial(2) | | |
(Dollars in thousands) | | | | | | | | | | Amount | | % |
Risk Rating: | | | | | | | | | | | | |
Special mention | | $ | 22,845 | | | $ | — | | | $ | 11,365 | | | $ | — | | | $ | 34,210 | | | |
Substandard: | | | | | | | | | | | | |
Accrual | | 61,158 | | | 30,436 | | | 27,167 | | | — | | | 118,761 | | | |
Nonaccrual | | 17,473 | | | 9,107 | | | 2,197 | | | — | | | 28,777 | | | |
Doubtful | | 3,534 | | | 156 | | | — | | | — | | | 3,690 | | | |
Total Special Mention and Substandard | | 105,010 | | | 39,699 | | | 40,729 | | | — | | | 185,438 | | | 3 | % |
Acquired impaired | | 1,664 | | | 6,809 | | | 12,655 | | | 487 | | | 21,615 | | | — | % |
Pass | | 2,179,677 | | | 1,226,900 | | | 2,218,601 | | | 513,915 | | | 6,139,093 | | | 97 | % |
Total | | $ | 2,286,351 | | | $ | 1,273,408 | | | $ | 2,271,985 | | | $ | 514,402 | | | $ | 6,346,146 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving loans amortized cost basis | | Revolving loans converted to term | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | |
Commercial and industrial(1): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass(2) | | $ | 1,249,900 | | | $ | 568,960 | | | $ | 310,071 | | | $ | 207,981 | | | $ | 135,074 | | | $ | 176,408 | | | $ | 6,368 | | | $ | 137,064 | | | $ | 2,791,826 | |
Special mention | | 1,106 | | | 24,940 | | | 17,372 | | | 7,703 | | | 4,699 | | | 31,935 | | | — | | | 16,089 | | | 103,844 | |
Substandard or Lower | | 58,854 | | | 68,996 | | | 58,303 | | | 44,712 | | | 9,854 | | | 24,370 | | | 31 | | | 6,044 | | | 271,164 | |
| | $ | 1,309,860 | | | $ | 662,896 | | | $ | 385,746 | | | $ | 260,396 | | | $ | 149,627 | | | $ | 232,713 | | | $ | 6,399 | | | $ | 159,197 | | | $ | 3,166,834 | |
Owner-occupied commercial: | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 95,721 | | | $ | 262,486 | | | $ | 112,582 | | | $ | 166,073 | | | $ | 144,973 | | | $ | 340,010 | | | $ | — | | | $ | 149,516 | | | $ | 1,271,361 | |
Special mention | | — | | | 311 | | | — | | | 11,585 | | | — | | | 1,266 | | | — | | | 1,848 | | | 15,010 | |
Substandard or Lower | | 1,818 | | | 9,282 | | | 7,188 | | | 8,952 | | | 9,209 | | | 9,645 | | | — | | | 4,788 | | | 50,882 | |
| | $ | 97,539 | | | $ | 272,079 | | | $ | 119,770 | | | $ | 186,610 | | | $ | 154,182 | | | $ | 350,921 | | | $ | — | | | $ | 156,152 | | | $ | 1,337,253 | |
Commercial mortgages: | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 163,925 | | | $ | 335,085 | | | $ | 291,054 | | | $ | 316,021 | | | $ | 317,738 | | | $ | 530,844 | | | $ | — | | | $ | 127,835 | | | $ | 2,082,502 | |
Special mention | | 20,041 | | | 6,276 | | | — | | | 15,857 | | | 1,901 | | | 4,570 | | | — | | | 1,870 | | | 50,515 | |
Substandard or Lower | | 140 | | | 1,306 | | | 1,394 | | | 4,157 | | | 2,650 | | | 20,604 | | | — | | | 2,279 | | | 32,530 | |
| | $ | 184,106 | | | $ | 342,667 | | | $ | 292,448 | | | $ | 336,035 | | | $ | 322,289 | | | $ | 556,018 | | | $ | — | | | $ | 131,984 | | | $ | 2,165,547 | |
Construction: | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Pass | | $ | 90,202 | | | $ | 204,676 | | | $ | 220,350 | | | $ | 38,300 | | | $ | 6,156 | | | $ | 4,201 | | | $ | — | | | $ | 55,891 | | | $ | 619,776 | |
Special mention | | — | | | 8,137 | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,137 | |
Substandard or Lower | | — | | | 8,775 | | | — | | | — | | | — | | | 88 | | | — | | | 1,728 | | | 10,591 | |
| | $ | 90,202 | | | $ | 221,588 | | | $ | 220,350 | | | $ | 38,300 | | | $ | 6,156 | | | $ | 4,289 | | | $ | — | | | $ | 57,619 | | | $ | 638,504 | |
Residential(3): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 12,967 | | | $ | 35,388 | | | $ | 92,212 | | | $ | 112,961 | | | $ | 173,609 | | | $ | 462,272 | | | $ | — | | | $ | — | | | $ | 889,409 | |
Nonperforming(4) | | — | | | — | | | — | | | — | | | 92 | | | 5,359 | | | — | | | — | | | 5,451 | |
| | $ | 12,967 | | | $ | 35,388 | | | $ | 92,212 | | | $ | 112,961 | | | $ | 173,701 | | | $ | 467,631 | | | $ | — | | | $ | — | | | $ | 894,860 | |
Consumer(5): | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | |
Performing | | $ | 85,834 | | | $ | 165,512 | | | $ | 287,173 | | | $ | 80,871 | | | $ | 57,913 | | | $ | 70,555 | | | $ | 375,483 | | | $ | 7,392 | | | $ | 1,130,733 | |
Nonperforming(6) | | — | | | — | | | 651 | | | 219 | | | — | | | — | | | 1,378 | | | 390 | | | 2,638 | |
| | $ | 85,834 | | | $ | 165,512 | | | $ | 287,824 | | | $ | 81,090 | | | $ | 57,913 | | | $ | 70,555 | | | $ | 376,861 | | | $ | 7,782 | | | $ | 1,133,371 | |
(1)Includes commercial small business leases.
(2)Includes $2.3 billion$945.1 million of acquired non-impairedPPP loans.
(3)Excludes reverse mortgages at fair value.
(4)Includes troubled debt restructured mortgages performing in accordance with the loans' modified terms and are accruing interest.
(5)Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans.
(6)Includes troubled debt restructured home equity installment loans performing in accordance with the loans' modified terms and are accruing interest.
The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease loss, as of September 30, 2019.December 31, 2019 under the incurred loss model.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | | | |
| | Commercial and Industrial | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Total Commercial(1) | | |
(Dollars in thousands) | | | | | | | | | | Amount | | % |
Risk Rating: | | | | | | | | | | | | |
Special mention | | $ | 8,710 | | | $ | 21,230 | | | $ | — | | | $ | — | | | $ | 29,940 | | | |
Substandard: | | | | | | | | | | | | | |
Accrual | | 37,424 | | | 21,081 | | | 9,767 | | | 168 | | | 68,440 | | | |
Nonaccrual | | 13,180 | | | 4,406 | | | 3,951 | | | 2,337 | | | 23,874 | | | |
Doubtful | | 876 | | | — | | | — | | | 444 | | | 1,320 | | | |
Total Special Mention and Substandard | | 60,190 | | | 46,717 | | | 13,718 | | | 2,949 | | | 123,574 | | | 3 | % |
Acquired impaired | | 1,531 | | | 4,248 | | | 7,504 | | | 749 | | | 14,032 | | | — | % |
Pass | | 1,410,768 | | | 1,009,009 | | | 1,141,517 | | | 312,868 | | | 3,874,162 | | | 97 | % |
Total | | $ | 1,472,489 | | | $ | 1,059,974 | | | $ | 1,162,739 | | | $ | 316,566 | | | $ | 4,011,768 | | | 100 | % |
Commercial Credit Exposure
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | | | | | |
| | Commercial and Industrial(1) | | Owner-occupied Commercial | | Commercial Mortgages | | Construction | | Total Commercial(2) | | |
(Dollars in thousands) | | | | | | | | | | Amount | | % |
Risk Rating: | | | | | | | | | | | | |
Special mention | | $ | 12,287 | | | $ | — | | | $ | 40,478 | | | $ | — | | | $ | 52,765 | | | |
Substandard: | | | | | | | | | | | | |
Accrual | | 78,809 | | | 32,679 | | | 23,017 | | | — | | | 134,505 | | | |
Nonaccrual | | 9,852 | | | 4,037 | | | 1,626 | | | — | | | 15,515 | | | |
Doubtful | | 1,179 | | | 23 | | | — | | | — | | | 1,202 | | | |
Total Special Mention and Substandard | | 102,127 | | | 36,739 | | | 65,121 | | | — | | | 203,987 | | | 3 | % |
Acquired impaired | | 1,564 | | | 6,757 | | | 8,670 | | | 491 | | | 17,482 | | | — | % |
Pass | | 2,131,737 | | | 1,252,970 | | | 2,149,185 | | | 580,591 | | | 6,114,483 | | | 97 | % |
Total | | $ | 2,235,428 | | | $ | 1,296,466 | | | $ | 2,222,976 | | | $ | 581,082 | | | $ | 6,335,952 | | | 100 | % |
(1)Includes $350.5 millioncommercial small business leases.
(2)Includes $2.2 billion of acquired non-impaired loans as of December 31, 2018.2019.
Residential and ConsumerRetail Credit Exposure
| | | Residential(2) | | | Consumer | | | Total Residential and Consumer(3) | | | | Residential(2) | | | Consumer | | | Total Retail(3) | |
| | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, 2019 | | | December 31, 2018 | | | | | December 31, 2019 | | | December 31, 2019 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent | (Dollars in thousands) | | | December 31, 2019 | | | | | | Amount | | Percent |
Nonperforming(1) | Nonperforming(1) | | $ | 12,413 | | | $ | 11,017 | | | $ | 7,407 | | | $ | 7,883 | | | $ | 19,820 | | | 1 | | | $ | 18,900 | | | 2 | % | Nonperforming(1) | | | | | $ | 7,374 | | | | $ | 20,232 | | | 1 | % |
Acquired impaired loans | Acquired impaired loans | | 7,655 | | | 761 | | | 2,545 | | | 151 | | | 10,200 | | | — | | | 912 | | | — | % | Acquired impaired loans | | | 7,326 | | | | 2,127 | | | | 9,453 | | | — | % |
Performing | Performing | | 1,013,828 | | | 189,772 | | | 1,128,921 | | | 672,905 | | | 2,142,749 | | | 99 | | | 862,677 | | | 98 | % | Performing | | | 979,695 | | | | 1,119,230 | | | | 2,098,925 | | | 99 | % |
Total | Total | | $ | 1,033,896 | | | $ | 201,550 | | | $ | 1,138,873 | | | $ | 680,939 | | | $ | 2,172,769 | | | 100 | | | $ | 882,489 | | | 100 | % | Total | | | $ | 999,879 | | | | $ | 1,128,731 | | | | $ | 2,128,610 | | | 100 | % |
(1)Includes $13.9 million as of September 30, 2019 and $14.0 million as of December 31, 20182019 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest.
(2)Residential performing loans excludes $17.7 million and $16.5$16.6 million of reverse mortgages at fair value as of September 30, 2019 and December 31, 2018, respectively.2019.
(3)Total includes $1.1 billion and $79.5 million in acquired non-impaired loans as of September 30, 2019 and December 31, 2018, respectively.2019.
Troubled Debt Restructurings (TDRs)
TDRs are recorded in accordance with ASC 310-40, Troubled Debt Restructuring by Creditors.
The following table presents the balance of TDRs as of the indicated dates:
| | (Dollars in thousands) | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Performing TDRs | Performing TDRs | | $ | 14,125 | | | $ | 14,953 | | Performing TDRs | | $ | 14,550 | | | $ | 14,281 | |
Nonperforming TDRs | Nonperforming TDRs | | 6,667 | | | 10,211 | | Nonperforming TDRs | | 4,284 | | | 5,896 | |
Total TDRs | Total TDRs | | $ | 20,792 | | | $ | 25,164 | | Total TDRs | | $ | 18,834 | | | $ | 20,177 | |
Approximately $0.7$0.8 million and $1.2$0.6 million in related reserves have been established for these loans at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
The following table presentstables present information regarding the types of loan modifications made for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | Three months ended September 30, 2019 | | | Nine months ended September 30, 2019 | | | Three months ended June 30, 2020 | | | Six months ended June 30, 2020 | |
| | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total |
Commercial and Industrial | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 2 | | | 3 | | |
Commercial and industrial | | Commercial and industrial | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
Owner-occupied commercial | Owner-occupied commercial | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | | Owner-occupied commercial | | 2 | | | — | | | — | | | — | | | 2 | | | 3 | | | — | | | — | | | — | | | 3 | |
Commercial Mortgages | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | 2 | | |
Commercial mortgages | | Commercial mortgages | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Construction | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential | Residential | | — | | | — | | | 1 | | | — | | | 1 | | | 4 | | | — | | | 2 | | | — | | | 6 | | Residential | | — | | | — | | | 3 | | | 1 | | | 4 | | | — | | | — | | | 4 | | | 2 | | | 6 | |
Consumer | Consumer | | — | | | 2 | | | 1 | | | 2 | | | 5 | | | 5 | | | 3 | | | 2 | | | 2 | | | 12 | | Consumer | | — | | | — | | | 4 | | | 1 | | | 5 | | | — | | | — | | | 7 | | | 3 | | | 10 | |
Total | Total | | — | | | 2 | | | 2 | | | 2 | | | 6 | | | 10 | | | 4 | | | 4 | | | 7 | | | 25 | | Total | | 2 | | | — | | | 7 | | | 2 | | | 11 | | | 4 | | | 1 | | | 11 | | | 5 | | | 21 | |
| | | Three months ended September 30, 2018 | | | Nine months ended September 30, 2018 | | | Three months ended June 30, 2019 | | | Six months ended June 30, 2019 | |
| | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total | | Contractual payment reduction and term extension | | Maturity Date Extension | | Discharged in bankruptcy | | Other(1) | | Total |
Commercial and Industrial | | 3 | | | — | | | — | | | — | | | 3 | | | 6 | | | — | | | — | | | — | | | 6 | | |
Commercial and industrial | | Commercial and industrial | | — | | | 1 | | | — | | | 2 | | | 3 | | | — | | | 1 | | | — | | | 2 | | | 3 | |
Owner-occupied commercial | Owner-occupied commercial | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Owner-occupied commercial | | — | | | — | | | — | | | 2 | | | 2 | | | — | | | — | | | — | | | 2 | | | 2 | |
Commercial Mortgages | | 1 | | | — | | | — | | | — | | | 1 | | | 2 | | | 1 | | | — | | | — | | | 3 | | |
Commercial mortgages | | Commercial mortgages | | — | | | — | | | — | | | 1 | | | 1 | | | 1 | | | — | | | — | | | 1 | | | 2 | |
Construction | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential | Residential | | — | | | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | — | | | 4 | | Residential | | 3 | | | — | | | — | | | — | | | 3 | | | 4 | | | — | | | 1 | | | — | | | 5 | |
Consumer | Consumer | | 1 | | | — | | | 1 | | | — | | | 2 | | | 8 | | | 1 | | | 4 | | | 2 | | | 15 | | Consumer | | 3 | | | 1 | | | — | | | — | | | 4 | | | 6 | | | 1 | | | 1 | | | — | | | 8 | |
Total | Total | | 5 | | | — | | | 1 | | | — | | | 6 | | | 20 | | | 3 | | | 4 | | | 2 | | | 29 | | Total | | 6 | | | 2 | | | — | | | 5 | | | 13 | | | 11 | | | 2 | | | 2 | | | 5 | | | 20 | |
(1)Other includes underwriting exceptions.
Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, which is typically six months, and repayment is reasonably assured.
The following table presents loans identifiedmodified as TDRs during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification | (Dollars in thousands) | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification | | Pre Modification | | Post Modification |
Commercial | Commercial | | $ | — | | | $ | — | | | $ | 320 | | | $ | 320 | | | $ | 1,335 | | | $ | 1,335 | | | $ | 5,102 | | | $ | 5,102 | | Commercial | | $ | — | | | $ | — | | | $ | 1,347 | | | $ | 1,347 | | | $ | 31 | | | $ | 31 | | | $ | 1,347 | | | $ | 1,347 | |
Owner-occupied commercial | Owner-occupied commercial | | — | | | — | | | — | | | — | | | 1,413 | | | 1,413 | | | — | | | — | | Owner-occupied commercial | | 567 | | | 567 | | | 1,435 | | | 1,435 | | | 1,216 | | | 1,216 | | | 1,435 | | | 1,435 | |
Commercial mortgages | Commercial mortgages | | — | | | — | | | 168 | | | 168 | | | 504 | | | 504 | | | 2,190 | | | 2,190 | | Commercial mortgages | | — | | | — | | | 483 | | | 483 | | | 104 | | | 104 | | | 514 | | | 514 | |
Construction | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | 920 | | | 920 | | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential | Residential | | 253 | | | 253 | | | — | | | — | | | 670 | | | 670 | | | 469 | | | 469 | | Residential | | 905 | | | 905 | | | 321 | | | 321 | | | 1,126 | | | 1,126 | | | 423 | | | 423 | |
Consumer | Consumer | | 500 | | | 500 | | | 113 | | | 113 | | | 1,807 | | | 1,807 | | | 1,236 | | | 1,236 | | Consumer | | 245 | | | 245 | | | 540 | | | 540 | | | 459 | | | 459 | | | 1,408 | | | 1,408 | |
Total | Total | | $ | 753 | | | $ | 753 | | | $ | 601 | | | $ | 601 | | | $ | 5,729 | | | $ | 5,729 | | | $ | 9,917 | | | $ | 9,917 | | Total | | $ | 1,717 | | | $ | 1,717 | | | $ | 4,126 | | | $ | 4,126 | | | $ | 2,936 | | | $ | 2,936 | | | $ | 5,127 | | | $ | 5,127 | |
During the three and six months ended SeptemberJune 30, 2019 and 2018,2020, the TDRs set forth in the table above both resulted in a less than $0.1 million decreaseand $0.1 million increase in ourthe allowance for loancredit losses, respectively, and 0 additional charge-offs. Duringcharge-offs in either period. For the ninethree and six months ended SeptemberJune 30, 2019 the TDRs set forth in the table above resulted in a $0.1 million and $0.2 million decrease in ourthe allowance for loancredit losses, respectively, and 0 additional charge-offs compared to a $0.7 million decrease in our allowance for loan losses and $0.1 million additional charge-offs for the same period in 2018.either period.
During the three months ended SeptemberJune 30, 2019, 22020, 0 TDRs defaulted that had received troubled debt modification during the past twelve months, compared to 3 TDRs with a total loan amount of $0.2 million, compared with 5 loans with a total loan amount of $0.5$1.2 million during the three months ended SeptemberJune 30, 2018.2019. During the ninesix months ended SeptemberJune 30, 2019, 62020, 0 TDRs defaulted that had received troubled debt modification during the past twelve months, with a total loan amount of $1.5 million, compared with 94 TDRs with a total loan amount of $0.7$1.3 million during the ninesix months ended SeptemberJune 30, 2018.2019.
During the three months ended June 30, 2020, the Company began providing a number of customer relief programs in its commercial and retail portfolios, such as payment deferrals or interest only payments on loans and leases. The TDRs set forth in the table above did not occur as a result of the loan forbearance program under the CARES Act. During the second quarter of 2020, the Company modified approximately $2.1 billion of loans and leases to provide its customers this monetary relief.
9.8. LEASES
As a lessee, the Company enters into leases for its bank branches, corporate offices, and certain equipment. As a lessor, the Company primarily provides financing through ourits equipment leasing business.
Lessee
Our ongoingThe Company's leases have remaining lease terms of less than 1 year to 4342 years, which includes renewal options that are exercised at ourits discretion. The Company's lease terms to calculate the lease liability and right of use asset include options to extend the lease when it is reasonably certain that the Company will exercise the option. The lease liability and right of use asset is included in Other liabilities and Other assets, respectively, in the unaudited Consolidated Statement of Financial Condition. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. Operating lease expense is included in Occupancy expense in the unaudited Consolidated Statement of Income. We accountThe Company accounts for lease components separately from nonlease components. We subleaseThe Company subleases certain real estate to third parties.
The components of operating lease cost were as follows:
| | | | Three months ended | | Nine months ended | | Three months ended | | | Six months ended | |
(Dollars in thousands) | (Dollars in thousands) | | | September 30, 2019 | | September 30, 2019 | (Dollars in thousands) | | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Operating lease cost (1) | | | $ | 5,596 | | | $ | 14,610 | | |
Operating lease cost (1) (2) | | Operating lease cost (1) (2) | | $ | 4,950 | | | $ | 11,024 | | | $ | 9,500 | | | $ | 16,748 | |
Sublease income | Sublease income | | | (105) | | | (381) | | Sublease income | | (93) | | | (175) | | | (186) | | | (276) | |
Net lease cost | Net lease cost | | | $ | 5,491 | | | $ | 14,229 | | Net lease cost | | $ | 4,857 | | | $ | 10,849 | | | $ | 9,314 | | | $ | 16,472 | |
(1)Includes variable lease cost and short-term lease cost.
(2)
Includes $5.9 million and $8.0 million for the three and six months ended June 30, 2019, respectively, in Corporate development expense in the unaudited Consolidated Statement of Income.
Supplemental balance sheet information related to operating leases was as follows:
| | | | | | | | | | | | |
(Dollars in thousands) | | | | September 30, 2019 | | |
Assets | | | | | | |
Right of use assets | | | | $ | 165,979 | | | |
Total assets | | | | $ | 165,979 | | | |
| | | | | | |
Liabilities | | | | | | |
Lease liabilities | | | | $ | 180,973 | | | |
Total liabilities | | | | $ | 180,973 | | | |
| | | | | | |
| | | | | | |
Lease term and discount rate | | | | | | |
Weighted average remaining lease term (in years) | | | | | | |
Operating leases | | | | 19.66 | | |
Weighted average discount rate | | | | | | |
Operating leases | | | | 4.27 | % | | |
Maturities of operating lease liabilities under ASC 842, Leases (as adopted on January 1, 2019) were as follows:
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 |
2019 | | $ | 8,681 | |
2020 | | 16,853 | |
2021 | | 16,511 | |
2022 | | 16,463 | |
2023 | | 16,660 | |
After 2023 | | 210,453 | |
Total lease payments | | 285,621 | |
Less: Interest | | (104,648) | |
Present value of lease liabilities | | $ | 180,973 | |
| | |
| | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Assets | | | | |
Right of use assets | | $ | 156,919 | | | $ | 166,221 | |
Total assets | | $ | 156,919 | | | $ | 166,221 | |
| | | | |
Liabilities | | | | |
Lease liabilities | | $ | 171,612 | | | $ | 181,814 | |
Total liabilities | | $ | 171,612 | | | $ | 181,814 | |
| | | | |
Lease term and discount rate | | | | |
Weighted average remaining lease term (in years) | | | | |
Operating leases | | 19.39 | | 19.06 |
Weighted average discount rate | | | | |
Operating leases | | 4.25 | % | | 4.17 | % |
The minimum cash payments forMaturities of operating leases under ASC 840, Leases lease liabilities were as follows:
| | | | | | | | |
(Dollars in thousands) | | June 30, 2020 |
Remaining in 2020 | | $ | 8,724 | |
2021 | | 17,182 | |
2022 | | 17,146 | |
2023 | | 17,263 | |
2024 | | 16,095 | |
After 2024 | | 195,550 | |
Total lease payments | | 271,960 | |
Less: Interest | | (100,348) | |
Present value of lease liabilities | | $ | 171,612 | |
| | |
| | |
| (Dollars in thousands) | (Dollars in thousands) | | December 31, 2018 | (Dollars in thousands) | | December 31, 2019 |
2019 | | $ | 11,562 | | |
2020 | 2020 | | 11,411 | | 2020 | | $ | 18,591 | |
2021 | 2021 | | 11,132 | | 2021 | | 18,314 | |
2022 | 2022 | | 11,078 | | 2022 | | 18,315 | |
2023 | 2023 | | 11,141 | | 2023 | | 18,525 | |
After 2023 | | 169,929 | | |
Total minimum lease payments | | $ | 226,253 | | |
| 2024 | | 2024 | | 17,390 | |
After 2024 | | After 2024 | | 197,203 | |
Total lease payments | | Total lease payments | | 288,338 | |
Less: Interest | | Less: Interest | | (106,524) | |
Present value of lease liabilities | | Present value of lease liabilities | | $ | 181,814 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | |
| | Nine months ended | | |
(Dollars in thousands) | | September 30, 2019 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 12,564 | | | |
Right of use assets obtained in exchange for new operating lease liabilities (non-cash) | | 61,693 | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Six months ended | | |
(Dollars in thousands) | | | | | | June 30, 2020 | | June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases | | | | | | $ | 9,328 | | | $ | 7,941 | |
Right of use assets obtained in exchange for new operating lease liabilities (non-cash) | | | | | | — | | | 61,693 | |
Lessor Equipment Leasing
WSFS provides equipment and small business lease financing through our twoits leasing subsidiaries, BEFC andsubsidiary, NewLane Finance, acquired from ourin the Beneficial acquisition. Interest income from direct financing leases where the Company is a lessor is recognized in Interest and Feesfees on Loansloans and Leasesleases on the Consolidated Statements of Income. The allowance for credit losses on finance leases is included in Provision for credit losses on the Consolidated Statements of Income.
The components of direct finance lease income are summarized in the table below:
| | | Three months ended | | Nine months ended | | Three months ended | | | Six months ended | |
(Dollars in thousands) | (Dollars in thousands) | | September 30, 2019 | | September 30, 2019 | (Dollars in thousands) | | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Direct financing leases: | Direct financing leases: | | | | | Direct financing leases: | | | | | | | | |
Interest income on lease receivable | Interest income on lease receivable | | $ | 2,048 | | | $ | 5,826 | | Interest income on lease receivable | | $ | 3,813 | | | $ | 3,109 | | | $ | 7,379 | | | $ | 3,778 | |
Interest income on deferred fees and costs | Interest income on deferred fees and costs | | 63 | | | 326 | | Interest income on deferred fees and costs | | 93 | | | 206 | | | 188 | | | 263 | |
Total direct financing lease income | Total direct financing lease income | | $ | 2,111 | | | $ | 6,152 | | Total direct financing lease income | | $ | 3,906 | | | $ | 3,315 | | | $ | 7,567 | | | $ | 4,041 | |
Equipment leasing receivables relate to direct financing leases. The composition of the net investment in direct financing leases was as follows:
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 |
Lease receivables | | $ | 194,124 | |
Unearned income | | (24,427) | |
Deferred fees and costs | | 1,303 | |
Net investment in direct financing leases | | $ | 171,000 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Lease receivables | | $ | 241,570 | | | $ | 217,076 | |
Unearned income | | (31,279) | | | (28,446) | |
Deferred fees and costs | | 2,842 | | | 1,962 | |
Net investment in direct financing leases | | $ | 213,133 | | | $ | 190,592 | |
At September 30, 2019, futureFuture minimum lease payments to be received for direct financing leases were as follows:
| | | | | | | | |
(Dollars in thousands) | | Direct financing leases |
2019 | | $ | 17,006 | |
2020 | | 62,258 | |
2021 | | 48,874 | |
2022 | | 34,025 | |
2023 | | 21,713 | |
After 2023 | | 10,248 | |
Total lease payments | | $ | 194,124 | |
| | | | | | | | |
(Dollars in thousands) | | June 30, 2020 |
Remaining in 2020 | | $ | 40,894 | |
2021 | | 72,509 | |
2022 | | 55,897 | |
2023 | | 40,034 | |
2024 | | 24,805 | |
After 2024 | | 7,431 | |
Total lease payments | | $ | 241,570 | |
| | | | | | | | |
(Dollars in thousands) | | December 31, 2019 |
2020 | | $ | 71,067 | |
2021 | | 58,337 | |
2022 | | 42,274 | |
2023 | | 28,628 | |
2024 | | 14,450 | |
After 2024 | | 2,320 | |
Total lease payments | | $ | 217,076 | |
10.9. GOODWILL AND INTANGIBLE ASSETS
In accordance with ASC 805, Business Combinations (ASC 805) and ASC 350, Intangibles - Goodwill and Other (ASC 350), all assets acquired and liabilities assumed in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value as of acquisition date.
WSFS performs its annual impairment test on October 1 or more frequently if events and circumstances indicate that the fair value of a reporting unit is less than its carrying value. In between annual tests, management performs a qualitative review of goodwill quarterly as part of the Company's review of the overall business to ensure no events or circumstances have occurred that would impact its goodwill evaluation. During the ninesix months ended SeptemberJune 30, 2019, we did2020, management included considerations of the current economic environment caused by COVID-19 in its evaluation, and determined based on the totality of its qualitative assessment that it is not identify any indicatorsmore likely than not that the carrying value of goodwill is impaired. NaN goodwill impairment as it relates to goodwill or intangibles.exists during the six months ended June 30, 2020.
The following table shows the allocation of goodwill to ourthe reportable operating segments for purposes of goodwill impairment testing:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | WSFS Bank | | Cash Connect | | Wealth Management | | Consolidated Company |
December 31, 2018 | $ | 145,808 | | | $ | — | | | $ | 20,199 | | | $ | 166,007 | |
Goodwill from business combinations | 309,486 | | | — | | | — | | | 309,486 | |
Remeasurement period adjustments | (2,535) | | | — | | | — | | | (2,535) | |
September 30, 2019 | $ | 452,759 | | | $ | — | | | $ | 20,199 | | | $ | 472,958 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | WSFS Bank | | Cash Connect | | Wealth Management | | Consolidated Company |
December 31, 2019 | $ | 452,629 | | | $ | — | | | $ | 20,199 | | | $ | 472,828 | |
| | | | | | | |
Goodwill adjustments | — | | | — | | | — | | | — | |
June 30, 2020 | $ | 452,629 | | | $ | — | | | $ | 20,199 | | | $ | 472,828 | |
ASC 350 requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.
The following table summarizes our intangible assets:
| (Dollars in thousands) | (Dollars in thousands) | Gross Intangible Assets | | Accumulated Amortization | | Net Intangible Assets | | Amortization Period | (Dollars in thousands) | Gross Intangible Assets | | Accumulated Amortization | | Net Intangible Assets | | Amortization Period |
September 30, 2019 | | | | | | | | |
June 30, 2020 | | June 30, 2020 | | | | | | | |
Core deposits | Core deposits | $ | 95,711 | | | $ | (10,969) | | | $ | 84,742 | | | 10 years | Core deposits | $ | 95,711 | | | $ | (18,033) | | | $ | 77,678 | | | 10 years |
Customer relationships | Customer relationships | 17,561 | | | (7,015) | | | 10,546 | | | 7-15 years | Customer relationships | 17,561 | | | (8,216) | | | 9,345 | | | 7-15 years |
Non-compete agreements | Non-compete agreements | 221 | | | (135) | | | 86 | | | 5 years | Non-compete agreements | 221 | | | (168) | | | 53 | | | 5 years |
Loan servicing rights(1) | Loan servicing rights(1) | 4,932 | | | (1,414) | | | 3,518 | | | 10-25 years | Loan servicing rights(1) | 4,605 | | | (1,994) | | | 2,611 | | | 10-25 years |
Total intangible assets | Total intangible assets | $ | 118,425 | | | $ | (19,533) | | | $ | 98,892 | | | Total intangible assets | $ | 118,098 | | | $ | (28,411) | | | $ | 89,687 | | |
December 31, 2018 | | | | | | | |
December 31, 2019 | | December 31, 2019 | | | | | | |
Core deposits | Core deposits | $ | 10,658 | | | $ | (5,285) | | | $ | 5,373 | | | 10 years | Core deposits | $ | 95,711 | | | $ | (13,326) | | | $ | 82,385 | | | 10 years |
Customer relationships | Customer relationships | 17,561 | | | (5,815) | | | 11,746 | | | 7-15 years | Customer relationships | 17,561 | | | (7,416) | | | 10,145 | | | 7-15 years |
Non-compete agreements | Non-compete agreements | 221 | | | (101) | | | 120 | | | 5 years | Non-compete agreements | 221 | | | (146) | | | 75 | | | 5 years |
Loan servicing rights(2) | Loan servicing rights(2) | 2,652 | | | (1,301) | | | 1,351 | | | 10-30 years | Loan servicing rights(2) | 4,880 | | | (1,568) | | | 3,312 | | | 10-25 years |
Favorable lease asset (2) | 1,932 | | | (506) | | | 1,426 | | | 10 months-18 years | |
Total intangible assets | Total intangible assets | $ | 33,024 | | | $ | (13,008) | | | $ | 20,016 | | | Total intangible assets | $ | 118,373 | | | $ | (22,456) | | | $ | 95,917 | | |
(1)Includes impairment losses of $0.2$0.3 million and $0.4 million the three and six months ended June 30, 2020, respectively.
(2)Includes impairment losses of $0.5 million for the three and nine monthsyear ended September 30,December 31, 2019 respectively.
(2)The favorable lease asset was fully amortized and written off during the nine months ended September 30, 2019 as a result of our adoption of ASU 2016-02 on January 1, 2019. See Note 2 for further information.
We Company recognized amortization expense on intangible assets of $2.8 million and $6.9$5.5 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, and $0.7compared to $2.8 million and $2.1$4.1 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively.
The following table presents the estimated future amortization expense on our intangible assets:
| | | | | |
(Dollars in thousands) | Amortization of Intangibles |
Remaining in 2019 | $ | 2,964 | |
2020 | 11,614 | |
2021 | 11,167 | |
2022 | 10,995 | |
2023 | 10,875 | |
Thereafter | 51,277 | |
Total | $ | 98,892 | |
| | | | | |
(Dollars in thousands) | June 30, 2020 |
Remaining in 2020 | $ | 5,747 | |
2021 | 11,194 | |
2022 | 10,991 | |
2023 | 10,847 | |
2024 | 10,685 | |
Thereafter | 40,223 | |
Total | $ | 89,687 | |
11.
10. DEPOSITS
The following table shows our deposits by category:
| (Dollars in thousands) | (Dollars in thousands) | | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | | June 30, 2020 | | December 31, 2019 |
Noninterest-bearing: | Noninterest-bearing: | | | | | | Noninterest-bearing: | | | | | |
| | Noninterest demand | | | $ | 2,268,615 | | | $ | 1,626,252 | | | Noninterest demand | | | $ | 3,188,046 | | | $ | 2,189,573 | |
| | Total noninterest-bearing | | $ | 2,268,615 | | | $ | 1,626,252 | | | Total noninterest-bearing | | $ | 3,188,046 | | | $ | 2,189,573 | |
| Interest-bearing: | Interest-bearing: | | | Interest-bearing: | | |
| | Interest-bearing demand | | | $ | 2,177,189 | | | $ | 1,062,228 | | | Interest-bearing demand | | | $ | 2,302,484 | | | $ | 2,129,725 | |
| | Savings | | | 1,562,591 | | | 538,213 | | | Savings | | | 1,731,875 | | | 1,563,000 | |
| | Money market | | | 1,952,306 | | | 1,542,962 | | | Money market | | | 2,333,326 | | | 2,100,188 | |
| | | Customer time deposits | | | 1,330,227 | | | 672,942 | | | Customer time deposits | | | 1,228,440 | | | 1,356,610 | |
| | Brokered deposits | | | 242,265 | | | 197,834 | | | Brokered deposits | | | 278,329 | | | 247,761 | |
| | Total interest-bearing | | 7,264,578 | | | 4,014,179 | | | Total interest-bearing | | 7,874,454 | | | 7,397,284 | |
| | Total deposits | | $ | 9,533,193 | | | $ | 5,640,431 | | | Total deposits | | $ | 11,062,500 | | | $ | 9,586,857 | |
12.11. ASSOCIATE BENEFIT PLANS
Postretirement Medical Benefits
We shareThe Company shares certain costs of providing health and life insurance benefits to eligible retired Associates (employees) and their eligible dependents. Previously, all Associates were eligible for these benefits if they reached normal retirement age while working for us.the Company. Effective March 31, 2014, wethe Company changed the eligibility of this plan to include only those Associates who have achieved ten years of service with us as of March 31, 2014. As of December 31, 2014, weThe Company began to use the mortality table issued by the Office of the Actuary of the U.S. Bureau of Census in ourits calculation.
We accountThe Company accounts for ourits obligations under the provisions of ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that we recognizethe recognition of the costs of these benefits over an Associate’s active working career. Amortization of unrecognized net gains or losses resulting from experience different from that assumed and from changes in assumptions is included as a component of net periodic benefit cost over the remaining service period of active employees to the extent that such gains and losses exceed 10% of the accumulated postretirement benefit obligation, as of the beginning of the year. We recognize our net periodic benefitThe Company recognizes its service cost in Salaries, benefits and other compensation and the other components of net periodic benefit cost in ourOther operating expenses in the unaudited Consolidated Statements of Income.
The following table presents the components of net periodic benefit cost related to our postretirement medical benefits plan measured at January 1, 2019 and 2018.plan.
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | Service cost | | $ | 13 | | | $ | 15 | | | $ | 40 | | | $ | 45 | | Service cost | | $ | 15 | | | $ | 14 | | | $ | 30 | | | $ | 27 | |
Interest cost | Interest cost | | 20 | | | 18 | | | 58 | | | 53 | | Interest cost | | 17 | | | 19 | | | 34 | | | 38 | |
Prior service cost amortization | Prior service cost amortization | | (19) | | | (19) | | | (57) | | | (57) | | Prior service cost amortization | | (19) | | | (19) | | | (38) | | | (38) | |
Net gain recognition | Net gain recognition | | (16) | | | (11) | | | (47) | | | (34) | | Net gain recognition | | (9) | | | (16) | | | (18) | | | (31) | |
Net periodic (benefit) cost | | $ | (2) | | | $ | 3 | | | $ | (6) | | | $ | 7 | | |
Net periodic cost (benefit) | | Net periodic cost (benefit) | | $ | 4 | | | $ | (2) | | | $ | 8 | | | $ | (4) | |
Alliance Associate Pension Plan
During the fourth quarter of 2015, wethe Company completed the acquisition of Alliance. At the time of the acquisition, wethe Company assumed the Alliance pension plan offered to its current Associates.
The following table presents the components of net periodic benefit cost related to the Alliance Associate Pension Plan measured at January 1, 2019 and 2018.Plan.
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | Service cost | | $ | 10 | | | $ | 10 | | | $ | 30 | | | $ | 30 | | Service cost | | $ | 7 | | | $ | 10 | | | $ | 17 | | | $ | 20 | |
Interest cost | Interest cost | | 70 | | | 75 | | | 208 | | | 222 | | Interest cost | | 42 | | | 69 | | | 105 | | | 138 | |
Expected return on plan assets | Expected return on plan assets | | (150) | | | (138) | | | (445) | | | (410) | | Expected return on plan assets | | (79) | | | (148) | | | (196) | | | (295) | |
Prior service cost amortization | Prior service cost amortization | | — | | | — | | | — | | | — | | Prior service cost amortization | | — | | | — | | | — | | | — | |
Net gain recognition | Net gain recognition | | — | | | — | | | — | | | — | | Net gain recognition | | — | | | — | | | — | | | — | |
Net periodic benefit | | $ | (70) | | | $ | (53) | | | $ | (207) | | | $ | (158) | | |
Plan settlement loss | | Plan settlement loss | | 1,431 | | | $ | — | | | 1,431 | | | $ | — | |
Net periodic cost (benefit) | | Net periodic cost (benefit) | | $ | 1,401 | | | $ | (69) | | | $ | 1,357 | | | $ | (137) | |
During the fourth quarter of 2018, the Company notified the Alliance pension plan participants, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) of its intention to terminate the plan. The Company currently anticipates completing the pension plan, termination duringand received IRS and PBGC approval in the first quarter of 2020. As of SeptemberThe Company completed the termination and contributed $0.5 million to the plan to settle the obligation during the three months ended June 30, 2019, the valuation of the benefit obligations and estimated future benefit payments did not include termination assumptions.2020.
Beneficial Associate Pension and other postretirement benefits plans
On March 1, 2019, wethe Company closed ourits acquisition of Beneficial. At the time of the acquisition, wethe Company assumed the pension plan covering certain eligible Beneficial Associates. The plan was frozen in 2008.
The following table presents the components of net periodic benefit cost related to the Beneficial pension benefits and other postretirement benefit plans.
| | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | | Three months ended June 30, 2020 | | | Six months ended June 30, 2020 | |
(Dollars in thousands) | (Dollars in thousands) | | Pension Benefits | | | Other Postretirement Benefits | | (Dollars in thousands) | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits |
Service cost | Service cost | | $ | — | | | $ | — | | | $ | 23 | | | $ | 53 | | Service cost | | $ | — | | | $ | 29 | | | $ | — | | | $ | 58 | |
Interest cost | Interest cost | | 857 | | | 1,999 | | | 177 | | | 413 | | Interest cost | | 740 | | | 138 | | | 1,455 | | | 275 | |
Expected return on plan assets | Expected return on plan assets | | (1,442) | | | (3,365) | | | — | | | — | | Expected return on plan assets | | (1,588) | | | — | | | (3,182) | | | — | |
Prior service cost amortization | Prior service cost amortization | | — | | | — | | | — | | | — | | Prior service cost amortization | | — | | | — | | | — | | | — | |
Net gain recognition | | — | | | — | | | — | | | — | | |
Net loss (gain) recognition | | Net loss (gain) recognition | | 1 | | | (16) | | | 2 | | | (32) | |
Net periodic (benefit) cost | Net periodic (benefit) cost | | $ | (585) | | | $ | (1,366) | | | $ | 200 | | | $ | 466 | | Net periodic (benefit) cost | | $ | (847) | | | $ | 151 | | | $ | (1,725) | | | $ | 301 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | | | Six months ended June 30, 2019 | | |
(Dollars in thousands) | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits |
Service cost | | $ | — | | | $ | 23 | | | $ | — | | | $ | 30 | |
Interest cost | | 857 | | | 177 | | | 1,142 | | | 236 | |
Expected return on plan assets | | (1,442) | | | — | | | (1,923) | | | — | |
Prior service cost amortization | | — | | | — | | | — | | | — | |
Net loss (gain) recognition | | — | | | — | | | — | | | — | |
Net periodic (benefit) cost | | $ | (585) | | | $ | 200 | | | $ | (781) | | | $ | 266 | |
13.12. INCOME TAXES
We accountThe Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exerciseThe company exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based on changes in business factors and tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.
ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize,The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on ouran analysis of tax regulations and interpretations.
There were 0 unrecognized tax benefits as of SeptemberJune 30, 2019. We record2020. The Company records interest and penalties on potential income tax deficiencies as income tax expense. OurThe Company's federal and state tax returns for the 2016 through 20182019 tax years are subject to examination as of SeptemberJune 30, 2019. We do2020. The Company does not expect to record or realize any material unrecognized tax benefits during 2019.2020.
As a result of the adoption of ASC 326 - Credit Losses on January 1, 2020, the tax impact relating to the incremental provision for expected credit losses from financial assets held at amortized cost has been reflected as a credit to retained earnings to reflect the tax impact of increased credit reserves. Accordingly, $8.5 million of such provision for credit losses has been reflected as an income tax credit and deferred tax asset on the Company's Consolidated Statements of Financial Condition.
As a result of the CARES Act, an additional $1.8 million income tax benefit and deferred tax asset was recognized on the Company's Consolidated Statements of Financial Condition. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for details.
As a result of the adoption of ASU No. 2014-01, Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects, the amortization of ourthe low-income housing credit investments has been reflected as income tax expense. Accordingly, $0.9$0.8 million and $0.5$0.6 million of such amortization has been reflected as income tax expense for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and $2.1$1.6 million and $1.4$1.3 million of such amortization has been reflected as income tax expense for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively .respectively.
The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the ninesix months ended SeptemberJune 30, 20192020 were $1.9$1.4 million, $2.1$1.6 million and $0.5$0.4 million, respectively. The carrying value of the investment in affordable housing credits is $26.7$28.2 million at SeptemberJune 30, 2019,2020, compared to $16.9$25.8 million at December 31, 2018.2019.
14.
13. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
ASC 820-10, Fair Value Measurement - Overall (ASC 820-10) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
•Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following tables present financial instruments carried at fair value as of SeptemberJune 30, 20192020 and December 31, 20182019 by level in the valuation hierarchy (as described above):
| | | September 30, 2019 | | | June 30, 2020 | |
(Dollars in thousands) | (Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | (Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets measured at fair value on a recurring basis: | Assets measured at fair value on a recurring basis: | | | | | | | | | Assets measured at fair value on a recurring basis: | | | | | | | | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
CMO | CMO | | $ | — | | | $ | 365,246 | | | $ | — | | | $ | 365,246 | | CMO | | $ | — | | | $ | 355,821 | | | $ | — | | | $ | 355,821 | |
FNMA MBS | FNMA MBS | | — | | | 1,162,747 | | | — | | | 1,162,747 | | FNMA MBS | | — | | | 1,394,035 | | | — | | | 1,394,035 | |
FHLMC MBS | FHLMC MBS | | — | | | 346,755 | | | — | | | 346,755 | | FHLMC MBS | | — | | | 297,547 | | | — | | | 297,547 | |
GNMA MBS | GNMA MBS | | — | | | 34,073 | | | — | | | 34,073 | | GNMA MBS | | — | | | 30,824 | | | — | | | 30,824 | |
| GSE | | GSE | | — | | | 117,162 | | | — | | | 117,162 | |
| Other assets | Other assets | | — | | | 6,540 | | | — | | | 6,540 | | Other assets | | — | | | 15,243 | | | — | | | 15,243 | |
Total assets measured at fair value on a recurring basis | Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 1,915,361 | | | $ | — | | | $ | 1,915,361 | | Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 2,210,632 | | | $ | — | | | $ | 2,210,632 | |
| Liabilities measured at fair value on a recurring basis: | Liabilities measured at fair value on a recurring basis: | | Liabilities measured at fair value on a recurring basis: | |
Other liabilities | Other liabilities | | $ | — | | | $ | 5,974 | | | $ | — | | | $ | 5,974 | | Other liabilities | | $ | — | | | $ | 9,017 | | | $ | 25,205 | | | $ | 34,222 | |
| Assets measured at fair value on a nonrecurring basis: | Assets measured at fair value on a nonrecurring basis: | | Assets measured at fair value on a nonrecurring basis: | |
Other investments | Other investments | | $ | — | | | $ | — | | | $ | 70,055 | | | $ | 70,055 | | Other investments | | $ | — | | | $ | — | | | $ | 10,211 | | | $ | 10,211 | |
Other real estate owned | Other real estate owned | | — | | | — | | | 3,693 | | | 3,693 | | Other real estate owned | | — | | | — | | | 4,153 | | | 4,153 | |
Loans held for sale | Loans held for sale | | — | | | 67,428 | | | — | | | 67,428 | | Loans held for sale | | — | | | 109,453 | | | — | | | 109,453 | |
Impaired loans, net | | — | | | — | | | 50,536 | | | 50,536 | | |
| Total assets measured at fair value on a nonrecurring basis | Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 67,428 | | | $ | 124,284 | | | $ | 191,712 | | Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 109,453 | | | $ | 14,364 | | | $ | 123,817 | |
| | | December 31, 2018 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | (Dollars in thousands) | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets measured at fair value on a recurring basis: | Assets measured at fair value on a recurring basis: | | Assets measured at fair value on a recurring basis: | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
CMO | CMO | | $ | — | | | $ | 371,750 | | | $ | — | | | $ | 371,750 | | CMO | | $ | — | | | $ | 340,230 | | | $ | — | | | $ | 340,230 | |
FNMA MBS | FNMA MBS | | — | | | 644,073 | | | — | | | 644,073 | | FNMA MBS | | — | | | 1,242,453 | | | — | | | 1,242,453 | |
FHLMC MBS | FHLMC MBS | | — | | | 153,922 | | | — | | | 153,922 | | FHLMC MBS | | — | | | 328,946 | | | — | | | 328,946 | |
GNMA MBS | GNMA MBS | | — | | | 35,334 | | | — | | | 35,334 | | GNMA MBS | | — | | | 33,285 | | | — | | | 33,285 | |
| Other assets | Other assets | | — | | | 2,098 | | | — | | | 2,098 | | Other assets | | — | | | 4,884 | | | — | | | 4,884 | |
Total assets measured at fair value on a recurring basis | Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 1,207,177 | | | $ | — | | | $ | 1,207,177 | | Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 1,949,798 | | | $ | — | | | $ | 1,949,798 | |
| Liabilities measured at fair value on a recurring basis: | Liabilities measured at fair value on a recurring basis: | | Liabilities measured at fair value on a recurring basis: | |
Other liabilities | Other liabilities | | $ | — | | | $ | 3,493 | | | $ | — | | | $ | 3,493 | | Other liabilities | | $ | — | | | $ | 3,918 | | | $ | — | | | $ | 3,918 | |
| Assets measured at fair value on a nonrecurring basis | Assets measured at fair value on a nonrecurring basis | | Assets measured at fair value on a nonrecurring basis | |
Other investments | Other investments | | — | | | — | | | 37,233 | | | 37,233 | | Other investments | | $ | — | | | $ | — | | | $ | 70,046 | | | $ | 70,046 | |
Other real estate owned | Other real estate owned | | — | | | — | | | 2,668 | | | 2,668 | | Other real estate owned | | — | | | — | | | 2,605 | | | 2,605 | |
Loans held for sale | Loans held for sale | | — | | | 25,318 | | | — | | | 25,318 | | Loans held for sale | | — | | | 83,872 | | | — | | | 83,872 | |
Impaired loans, net | | — | | | — | | | 47,094 | | | 47,094 | | |
| Total assets measured at fair value on a nonrecurring basis | Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 25,318 | | | $ | 86,995 | | | $ | 112,313 | | Total assets measured at fair value on a nonrecurring basis | | $ | — | | | $ | 83,872 | | | $ | 72,651 | | | $ | 156,523 | |
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2019.
Fair value is based on quoted market prices, where available. If such quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. OurThe Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe ourthe Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Available-for-sale securities
As of September 30, 2019, securitiesSecurities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are $1.9 billion in Federal Agency MBS. We believeThe Company believes that this Level 2 designation is appropriate for these securities under ASC 820-10 because, as, these securities are federal agency MBS with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtainthe Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.
Other investments
Other investments includes our equity investments without readily determinable fair values. These investments include, among others, our Visa Class B sharesvalues and our investments in Spring EQ and SoFi, all of which are categorized as Level 3. Our Visa Class B ownership includes shares acquired at no cost from our prior participation in Visa’s network while Visa operated as a cooperative as well as shares subsequently acquired through private transactions and auctions.
OurThe Company's equity investments without readily determinable fair values are held at cost, and are adjusted for any observable transactions during the reporting period. As a result of our adoption of ASU 2016-01 and observable market transactions, we recorded unrealized gains on our investments in Visa Class B shares and Spring EQ of $26.2 million during the nine months ended September 30, 2019 as compared to $18.6 million during the nine months ended September 30, 2018.
Other real estate owned
Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of ourother real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.
Loans held for sale
The fair value of our loans held for sale is based on estimates using Level 2 inputs. These inputs are based on pricing information obtained from wholesale mortgage banks and brokers and applied to loans with similar interest rates and maturities.
Impaired loans
We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which typically ranges from 10% - 20%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
The gross amount of impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans was $55.0 million and $49.4 million at September 30, 2019 and December 31, 2018, respectively. The valuation allowance on impaired loans was $4.5 million as of September 30, 2019 and $2.3 million as of December 31, 2018.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents
For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.
Investment securities
Fair value is estimated using quoted prices for similar securities, which we obtainthe Company obtains from a third party vendor. We utilizeThe Company uses one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by usthe Company to validate the vendor’s methodology as described above in available-for-sale securities.
Other investments
Other investments includes our equity investments without readily determinable fair values (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans held for sale
Loans held for sale are carried at their fair value (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial small business leases, commercial mortgages, owner-occupied commercial, construction, residential mortgages and consumer.portfolio segments (see Note 2). For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans, with the exception of reverse mortgages, are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair values of reverse mortgages are based on the net present value of the expected cash flows using a discount rate specific to the reverse mortgages portfolio. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral.collateral, if the loan is collateral dependent. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are used if appraisals are not available. This technique does contemplate an exit price.
Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh
The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.
Other assets
Other assets includes, among other things, investmentsinclude the fair value of interest rate swaps and derivatives on the residential mortgage held for sale loan pipeline. Valuation of interest rate swaps is obtained from an independent pricing service and also from the derivative counterparty. Valuation of the derivative related to the residential mortgage held for sale loan pipeline is based on valuation of the loans held for sale portfolio as described above in subsidiaries, prepaid expenses, interest and fee income receivable, derivative financial instruments and deferred tax assets (see discussion in “Fair Value of Financial Assets and Liabilities” section above)Loans held for sale.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.
Borrowed funds
Rates currently available to usthe Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Other liabilities
Other liabilities includes, among others, cash flow derivativesinclude the fair value of interest rate swaps, risk participation agreements and derivatives on the residential mortgage held for sale loan pipeline. Valuation of our cash flow derivativesinterest rate swaps and risk participation agreements is obtained from an independent pricing service and also from the derivative counterparty. Valuation of the derivative related to the residential mortgage held for sale loan pipeline is based on valuation of the loans held for sale portfolio as described above in Loans held for sale.
Off-balance sheet instruments
The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either usthe Company or the borrower, they only have value to usthe Company and the borrower.
Assets measured at fair value using significant unobservable inputs (Level 3)
The following table provides a description of the valuation technique and significant unobservable inputs for the Company's assets classified as Level 3 and measured at fair value on a nonrecurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | |
Financial Instrument | | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range (Weighted Average) |
Other investments | | $ | 10,211 | | | Observed market comparable transactions | | Period of observed transactions | | May 2020 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other real estate owned | | $ | 4,153 | | | Fair market value of collateral | | Costs to sell | | 5.0% - 12.0% (10.0%) |
| | | | | | | | |
Other liabilities | | $ | 25,205 | | | Discounted cash flow | | Timing of the resolution of the Visa litigation | | 3 - 8 years (5.75 years or 4Q 2025) |
| | | | | | | | |
| | | | | | | | |
The book value and estimated fair value of our financial instruments are as follows:
| | | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | Fair Value Measurement | | Book Value | | Fair Value | | Book Value | | Fair Value | (Dollars in thousands) | | Fair Value Measurement | | Book Value | | Fair Value | | Book Value | | Fair Value |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | Level 1 | | $ | 580,299 | | | $ | 580,299 | | | $ | 620,757 | | | $ | 620,757 | | Cash and cash equivalents | | Level 1 | | $ | 955,767 | | | $ | 955,767 | | | $ | 571,752 | | | $ | 571,752 | |
Investment securities available for sale | | See previous table | | 1,908,821 | | | 1,908,821 | | | 1,205,079 | | | 1,205,079 | | |
Investment securities held to maturity | | Level 2 | | 134,961 | | | 138,262 | | | 149,950 | | | 149,431 | | |
Investment securities available-for-sale | | Investment securities available-for-sale | | Level 2 | | 2,195,389 | | | 2,195,389 | | | 1,944,914 | | | 1,944,914 | |
Investment securities held-to-maturity, net | | Investment securities held-to-maturity, net | | Level 2 | | 127,601 | | | 132,198 | | | 133,601 | | | 136,625 | |
Other investments | Other investments | | Level 3 | | 70,055 | | | 70,055 | | | 37,233 | | | 37,233 | | Other investments | | Level 3 | | 10,211 | | | 10,211 | | | 70,046 | | | 70,046 | |
Loans, held for sale | Loans, held for sale | | Level 2 | | 67,428 | | | 67,428 | | | 25,318 | | | 25,318 | | Loans, held for sale | | Level 2 | | 109,453 | | | 109,453 | | | 83,872 | | | 83,872 | |
Loans, net(2)(1) | Loans, net(2)(1) | | Level 3 | | 8,430,176 | | | 8,530,619 | | | 4,816,825 | | | 4,772,377 | | Loans, net(2)(1) | | Level 3 | | 9,120,288 | | | 9,386,635 | | | 8,424,464 | | | 8,580,015 | |
Impaired loans, net | | Level 3 | | 50,536 | | | 50,536 | | | 47,094 | | | 47,094 | | |
| Stock in FHLB of Pittsburgh | Stock in FHLB of Pittsburgh | | Level 2 | | 22,630 | | | 22,630 | | | 19,259 | | | 19,259 | | Stock in FHLB of Pittsburgh | | Level 2 | | 9,772 | | | 9,772 | | | 21,097 | | | 21,097 | |
Accrued interest receivable | Accrued interest receivable | | Level 2 | | 38,771 | | | 38,771 | | | 22,001 | | | 22,001 | | Accrued interest receivable | | Level 2 | | 53,222 | | | 53,222 | | | 38,094 | | | 38,094 | |
Other assets | Other assets | | Level 2 | | 6,540 | | | 6,540 | | | 2,098 | | | 2,098 | | Other assets | | Level 2 | | 15,243 | | | 15,243 | | | 4,884 | | | 4,884 | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | Level 2 | | 9,533,193 | | | 9,835,611 | | | 5,640,431 | | | 5,597,227 | | Deposits | | Level 2 | | 11,062,500 | | | 11,052,211 | | | 9,586,857 | | | 9,575,394 | |
Borrowed funds | Borrowed funds | | Level 2 | | 554,783 | | | 555,555 | | | 699,788 | | | 694,526 | | Borrowed funds | | Level 2 | | 295,793 | | | 313,839 | | | 489,288 | | | 489,561 | |
Standby letters of credit | Standby letters of credit | | Level 3 | | 461 | | | 461 | | | 495 | | | 495 | | Standby letters of credit | | Level 3 | | 416 | | | 416 | | | 623 | | | 623 | |
Accrued interest payable | Accrued interest payable | | Level 2 | | 9,481 | | | 9,481 | | | 1,900 | | | 1,900 | | Accrued interest payable | | Level 2 | | 6,049 | | | 6,049 | | | 3,103 | | | 3,103 | |
Other liabilities | Other liabilities | | Level 2 | | 5,974 | | | 5,974 | | | 3,493 | | | 3,493 | | Other liabilities | | Levels 2, 3 | | 34,222 | | | 34,222 | | | 3,918 | | | 3,918 | |
(1) Excludes impaired loans, net.
(2) Includes reverse mortgage loans.
At SeptemberJune 30, 20192020 and December 31, 2018 we2019 the Company had 0 commitments to extend credit measured at fair value.
15.14. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
We areThe Company is exposed to certain risks arising from both economic conditions and ourits business operations. WeThe Company principally manage ourmanages its exposures to a wide variety of business and operational risks through management of ourits core business activities. We manageThe Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of ourits assets and liabilities. We manageThe Company manages a matched book with respect to ourits derivative instruments in order to minimize ourits net risk exposure resulting from such transactions.
Fair Values of Derivative Instruments
The table below presents the fair value of our derivative financial instruments as well as their location on the unaudited Consolidated Statements of Financial Condition as of SeptemberJune 30, 2019.2020.
| | | Fair Values of Derivative Instruments | | | Fair Values of Derivative Instruments | |
(Dollars in thousands) | (Dollars in thousands) | | Count | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) | (Dollars in thousands) | | | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) |
Derivatives designated as hedging instruments: | | | | | | | | | |
Interest rate products | | 3 | | | $ | 75,000 | | | Other liabilities | | $ | (591) | | |
Total | | $ | 75,000 | | | $ | (591) | | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | | Derivatives not designated as hedging instruments: | | | | |
Interest rate products | Interest rate products | | $ | 80,405 | | | Other assets | | | $ | 4,085 | | Interest rate products | | $ | 65,626 | | | Other assets | | $ | 6,579 | |
Interest rate products | Interest rate products | | 80,405 | | | Other liabilities | | | (5,029) | | Interest rate products | | 65,626 | | | Other liabilities | | (7,404) | |
Risk participation agreements | Risk participation agreements | | 5,402 | | | Other liabilities | | | (10) | | Risk participation agreements | | 4,449 | | | Other liabilities | | (14) | |
Interest rate lock commitments with customers | Interest rate lock commitments with customers | | 117,744 | | | Other assets | | | 1,940 | | Interest rate lock commitments with customers | | 287,204 | | | Other assets | | 8,218 | |
Interest rate lock commitments with customers | Interest rate lock commitments with customers | | 23,043 | | | Other liabilities | | | (130) | | Interest rate lock commitments with customers | | 20,260 | | | Other liabilities | | (132) | |
Forward sale commitments | Forward sale commitments | | 66,979 | | | Other assets | | | 515 | | Forward sale commitments | | 44,840 | | | Other assets | | 446 | |
Forward sale commitments | Forward sale commitments | | 76,733 | | | Other liabilities | | | (214) | | Forward sale commitments | | 232,570 | | | Other liabilities | | (1,467) | |
Total | | $ | 450,711 | | | $ | 1,157 | | |
Financial derivatives related to sales of certain Visa Class B shares | | Financial derivatives related to sales of certain Visa Class B shares | | 113,177 | | | Other liabilities | | (25,205) | |
Total derivatives | Total derivatives | | $ | 525,711 | | | $ | 566 | | Total derivatives | | $ | 833,752 | | | $ | (18,979) | |
The table below presents the fair value of our derivative financial instruments as well as their location on the Consolidated Statements of Financial Condition as of December 31, 2018.2019.
| | | Fair Values of Derivative Instruments | | | Fair Values of Derivative Instruments | |
(Dollars in thousands) | (Dollars in thousands) | | Count | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) | (Dollars in thousands) | | Count | | Notional | | Balance Sheet Location | | Derivatives (Fair Value) |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | | | | Derivatives designated as hedging instruments: | | | | | | | | |
Interest rate products | Interest rate products | | 3 | | | $ | 75,000 | | | Other liabilities | | $ | (3,308) | | Interest rate products | | 3 | | $ | 75,000 | | | Other liabilities | | $ | (759) | |
Total | Total | | $ | 75,000 | | | $ | (3,308) | | Total | | $ | 75,000 | | | $ | (759) | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | | Derivatives not designated as hedging instruments: | | | | |
| Interest rate products | | Interest rate products | | $ | 71,804 | | | Other assets | | $ | 2,520 | |
Interest rate products | | Interest rate products | | 71,804 | | | Other liabilities | | (2,688) | |
Risk participation agreements | | Risk participation agreements | | 4,524 | | | Other liabilities | | (4) | |
Interest rate lock commitments with customers | Interest rate lock commitments with customers | | | | $ | 40,795 | | | Other assets | | | $ | 686 | | Interest rate lock commitments with customers | | 99,057 | | | Other assets | | 1,768 | |
Interest rate lock commitments with customers | Interest rate lock commitments with customers | | | | 6,530 | | | Other liabilities | | | (24) | | Interest rate lock commitments with customers | | 28,505 | | | Other liabilities | | (191) | |
Forward sale commitments | Forward sale commitments | | | | 19,732 | | | Other assets | | | 143 | | Forward sale commitments | | 61,301 | | | Other assets | | 596 | |
Forward sale commitments | Forward sale commitments | | | | 25,876 | | | Other liabilities | | | (161) | | Forward sale commitments | | 90,177 | | | Other liabilities | | (276) | |
Total | Total | | | | $ | 92,933 | | | $ | 644 | | Total | | $ | 427,172 | | | $ | 1,725 | |
Total derivatives | Total derivatives | | | | $ | 167,933 | | | $ | (2,664) | | Total derivatives | | $ | 502,172 | | | $ | 966 | |
Cash Flow Hedges of Interest Rate Risk
OurThe Company's objectives in using interest rate derivatives are to add stability to interest income and to manage ourits exposure to interest rate movements. To accomplish this objective, wethe Company primarily useuses interest rate swaps as part of ourits interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for usthe Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.
Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings. During the ninesix months ended SeptemberJune 30, 2019,2020, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool.
Amounts reportedThe Company has agreements with certain derivative counterparties that contain a provision under which, if it defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where if it fails to maintain its status as a well-capitalized or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
In April 2020, the Company terminated its three interest rate derivatives that were designated as cash flow hedges for a net gain of $1.3 million. At this point, hedge accounting was discontinued, and the net gain was recognized in accumulated other comprehensive income (loss) related. Once a cash flow hedge is discontinued, the net gain or loss that remains in accumulated comprehensive income (loss) is reclassified into earnings when the transaction affects earnings. As the underlying hedged transaction continues to derivatives are reclassified to interest income as interest payments are receivedbe probable, the $1.3 million net gain will be recognized into earnings on our variable-rate pooled loans.a straight-line basis over each derivative's original contract term. During the next twelve months, we estimatethe Company estimates that $0.4$0.6 million will be reclassified as an increase to interest income. During the ninethree and six months ended SeptemberJune 30, 2019, $1.12020, $0.1 million was reclassified into interest income.income for both periods.
We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of one month (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
As of September 30, 2019, we had 3 outstanding interest rate derivatives with an aggregate notional amount of $75 million that were designated as cash flow hedges of interest rate risk.
Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the derivative financial instruments on the unaudited Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019.
| | | Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion) | | | Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion) | | | Location of (Loss) or Gain Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion) | | | Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion) | | | Location of (Loss) or Gain Reclassified from Accumulated OCI into Income (Effective Portion) |
(Dollars in thousands) | (Dollars in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | (Dollars in thousands) | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |
Derivatives in Cash Flow Hedging Relationships | Derivatives in Cash Flow Hedging Relationships | | 2019 | | 2018 | | 2019 | | 2018 | | Derivatives in Cash Flow Hedging Relationships | | 2020 | | 2019 | | 2020 | | 2019 | |
Interest Rate Products | Interest Rate Products | | $ | (368) | | | $ | 109 | | | $ | (2,005) | | | $ | (1,119) | | | Interest income | Interest Rate Products | | $ | (25) | | | $ | 1,007 | | | $ | 1,560 | | | $ | 1,637 | | | Interest income |
Total | Total | | $ | (368) | | | $ | 109 | | | $ | (2,005) | | | $ | (1,119) | | | Total | | $ | (25) | | | $ | 1,007 | | | $ | 1,560 | | | $ | 1,637 | | |
| | | Amount of Gain or (Loss) Recognized in Income | | | Amount of Gain or (Loss) Recognized in Income | | | Location of Gain or (Loss) Recognized in Income | | Amount of Gain or (Loss) Recognized in Income | | | Amount of Gain or (Loss) Recognized in Income | | | Location of Gain or (Loss) Recognized in Income |
(Dollars in thousands) | (Dollars in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | (Dollars in thousands) | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |
Derivatives Not Designated as a Hedging Instrument | Derivatives Not Designated as a Hedging Instrument | | 2019 | | 2018 | | 2019 | | 2018 | | | Derivatives Not Designated as a Hedging Instrument | | 2020 | | 2019 | | 2020 | | 2019 | | |
Interest Rate Lock Commitments | Interest Rate Lock Commitments | | $ | 322 | | | $ | 192 | | | $ | 1,496 | | | $ | (104) | | | Mortgage banking activities, net | Interest Rate Lock Commitments | | $ | 3,178 | | | $ | 542 | | | $ | 6,227 | | | $ | 1,174 | | | Mortgage banking activities, net |
Forward Sale Commitments | Forward Sale Commitments | | (481) | | | $ | (176) | | | (1,203) | | | $ | (508) | | | Mortgage banking activities, net | Forward Sale Commitments | | (2,439) | | | (487) | | | (6,484) | | | $ | (721) | | | Mortgage banking activities, net |
Total | Total | | $ | (159) | | | $ | 16 | | | $ | 293 | | | $ | (612) | | | Total | | $ | 739 | | | $ | 55 | | | $ | (257) | | | $ | 453 | | |
Credit Risk-related Contingent Features
We have agreements with certain derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtednessThe Company has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain derivative counterparties that contain a provision where if we fail to maintain our status as a well-capitalized or adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.
As of September 30, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0.7 million. We have minimum collateral posting thresholds with certain of ourits derivative counterparties, and havehas posted collateral of $5.6$9.0 million against ourits obligations under these agreements. If wethe Company had breached any of these provisions at SeptemberJune 30, 2019, we2020, it could have been required to settle ourits obligations under the agreements at the termination value.
16.15. SEGMENT INFORMATION
As defined in ASC 280, Segment Reporting (ASC 280), an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluateThe Company evaluates performance based on pretax net income relative to resources used, and allocate resources based on these results. The accounting policies applicable to ourthe Company's segments are those that apply to ourits preparation of the accompanying unaudited Consolidated Financial Statements. Based on these criteria, we havethe Company has identified 3 segments: WSFS Bank, Cash Connect®, and Wealth Management.
The WSFS Bank segment provides financial products to commercial and retail customers. Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS Bank. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Accordingly, these departments are not considered discrete segments and are appropriately aggregated withinin the WSFS Bank segment in accordance with ASC 280.
OurThe Company's Cash Connect® segment provides ATM vault cash, smart safe and other cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and retail safes nationwide. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect®.
The Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate, and institutional clients through multiple integrated businesses. WSFS Wealth Investments provides financial advisory services along with 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 institutional trust division of WSFS, (doing business as WSFS Institutional Services)Services, provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients. The personal trust divisionChristiana Trust DE, a subsidiary of WSFS, (doing business as Christiana Trust) 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 units to provide comprehensive solutions to clients.
The following tables show segment results for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | Three Months Ended September 30, 2019 | | | Three Months Ended September 30, 2018 | | | | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | (Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Income | Statements of Income | | | | | | | | | | | | | | | | | Statements of Income | | | | | | | | | | | | | | | | |
External customer revenues: | External customer revenues: | | External customer revenues: | |
Interest income | Interest income | | $ | 138,585 | | | $ | — | | | $ | 2,677 | | | $ | 141,262 | | | $ | 72,836 | | | $ | — | | | $ | 2,579 | | | $ | 75,415 | | Interest income | | $ | 123,710 | | | $ | — | | | $ | 2,173 | | | $ | 125,883 | | | $ | 140,231 | | | $ | — | | | $ | 2,672 | | | $ | 142,903 | |
Noninterest income | Noninterest income | | 38,563 | | | 13,067 | | | 10,716 | | | 62,346 | | | 18,524 | | | 13,026 | | | 10,351 | | | 41,901 | | Noninterest income | | 44,304 | | | 9,008 | | | 11,063 | | | 64,375 | | | 18,870 | | | 13,355 | | | 10,646 | | | 42,871 | |
Total external customer revenues | Total external customer revenues | | 177,148 | | | 13,067 | | | 13,393 | | | 203,608 | | | 91,360 | | | 13,026 | | | 12,930 | | | 117,316 | | Total external customer revenues | | 168,014 | | | 9,008 | | | 13,236 | | | 190,258 | | | 159,101 | | | 13,355 | | | 13,318 | | | 185,774 | |
Inter-segment revenues: | Inter-segment revenues: | | | | | | | | | | | | | | | | | Inter-segment revenues: | | | | | | | | | | | | | | | | |
Interest income | Interest income | | 2,855 | | | — | | | 5,592 | | | 8,447 | | | 4,002 | | | — | | | 3,020 | | | 7,022 | | Interest income | | 937 | | | 237 | | | 2,442 | | | 3,616 | | | 3,345 | | | — | | | 4,052 | | | 7,397 | |
Noninterest income | Noninterest income | | 2,483 | | | 257 | | | 320 | | | 3,060 | | | 2,122 | | | 200 | | | 36 | | | 2,358 | | Noninterest income | | 3,542 | | | 188 | | | 347 | | | 4,077 | | | 2,156 | | | 192 | | | 211 | | | 2,559 | |
Total inter-segment revenues | Total inter-segment revenues | | 5,338 | | | 257 | | | 5,912 | | | 11,507 | | | 6,124 | | | 200 | | | 3,056 | | | 9,380 | | Total inter-segment revenues | | 4,479 | | | 425 | | | 2,789 | | | 7,693 | | | 5,501 | | | 192 | | | 4,263 | | | 9,956 | |
Total revenue | Total revenue | | 182,486 | | | 13,324 | | | 19,305 | | | 215,115 | | | 97,484 | | | 13,226 | | | 15,986 | | | 126,696 | | Total revenue | | 172,493 | | | 9,433 | | | 16,025 | | | 197,951 | | | 164,602 | | | 13,547 | | | 17,581 | | | 195,730 | |
External customer expenses: | External customer expenses: | | | | | | | | | | | | | | | | | External customer expenses: | | | | | | | | | | | | | | | | |
Interest expense | Interest expense | | 19,056 | | | — | | | 1,373 | | | 20,429 | | | 11,461 | | | — | | | 857 | | | 12,318 | | Interest expense | | 11,659 | | | — | | | 468 | | | 12,127 | | | 18,282 | | | — | | | 1,389 | | | 19,671 | |
Noninterest expenses | Noninterest expenses | | 93,146 | | | 9,132 | | | 7,283 | | | 109,561 | | | 44,922 | | | 8,133 | | | (601) | | | 52,454 | | Noninterest expenses | | 79,789 | | | 6,413 | | | 7,233 | | | 93,435 | | | 91,415 | | | 8,893 | | | 7,540 | | | 107,848 | |
Provision for loan losses | | 3,954 | | | — | | | 167 | | | 4,121 | | | 3,776 | | | — | | | (60) | | | 3,716 | | |
Provision for credit losses | | Provision for credit losses | | 93,819 | | | — | | | 935 | | | 94,754 | | | 12,239 | | | — | | | (44) | | | 12,195 | |
Total external customer expenses | Total external customer expenses | | 116,156 | | | 9,132 | | | 8,823 | | | 134,111 | | | 60,159 | | | 8,133 | | | 196 | | | 68,488 | | Total external customer expenses | | 185,267 | | | 6,413 | | | 8,636 | | | 200,316 | | | 121,936 | | | 8,893 | | | 8,885 | | | 139,714 | |
Inter-segment expenses: | Inter-segment expenses: | | | | | | | | | | | | | | | | | Inter-segment expenses: | | | | | | | | | | | | | | | | |
Interest expense | Interest expense | | 5,592 | | | 1,730 | | | 1,125 | | | 8,447 | | | 3,020 | | | 2,885 | | | 1,117 | | | 7,022 | | Interest expense | | 2,679 | | | 131 | | | 806 | | | 3,616 | | | 4,052 | | | 2,203 | | | 1,142 | | | 7,397 | |
Noninterest expenses | Noninterest expenses | | 577 | | | 680 | | | 1,803 | | | 3,060 | | | 236 | | | 627 | | | 1,495 | | | 2,358 | | Noninterest expenses | | 535 | | | 899 | | | 2,643 | | | 4,077 | | | 403 | | | 698 | | | 1,458 | | | 2,559 | |
Total inter-segment expenses | Total inter-segment expenses | | 6,169 | | | 2,410 | | | 2,928 | | | 11,507 | | | 3,256 | | | 3,512 | | | 2,612 | | | 9,380 | | Total inter-segment expenses | | 3,214 | | | 1,030 | | | 3,449 | | | 7,693 | | | 4,455 | | | 2,901 | | | 2,600 | | | 9,956 | |
Total expenses | Total expenses | | 122,325 | | | 11,542 | | | 11,751 | | | 145,618 | | | 63,415 | | | 11,645 | | | 2,808 | | | 77,868 | | Total expenses | | 188,481 | | | 7,443 | | | 12,085 | | | 208,009 | | | 126,391 | | | 11,794 | | | 11,485 | | | 149,670 | |
Income before taxes | | $ | 60,161 | | | $ | 1,782 | | | $ | 7,554 | | | $ | 69,497 | | | $ | 34,069 | | | $ | 1,581 | | | $ | 13,178 | | | $ | 48,828 | | |
Income tax provision | | | | | | | | 15,902 | | | | | | | | | 9,893 | | |
Consolidated net income | | 53,595 | | | 38,935 | | |
(Loss) income before taxes | | (Loss) income before taxes | | $ | (15,988) | | | $ | 1,990 | | | $ | 3,940 | | | $ | (10,058) | | | $ | 38,211 | | | $ | 1,753 | | | $ | 6,096 | | | $ | 46,060 | |
Income tax (benefit) provision | | Income tax (benefit) provision | | | | | | | | (2,247) | | | | | | | | | 10,091 | |
Consolidated net (loss) income | | Consolidated net (loss) income | | (7,811) | | | 35,969 | |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | | (287) | | | — | | Net loss attributable to noncontrolling interest | | (700) | | | (231) | |
Net income attributable to WSFS | | 53,882 | | | 38,935 | | |
Net (loss) income attributable to WSFS | | Net (loss) income attributable to WSFS | | (7,111) | | | 36,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | | | | | | | | Nine Months Ended September 30, 2018 | | | | | | |
(Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Income | | | | | | | | | | | | | | | | |
External customer revenues: | | | | | | | | | | | | | | | | |
Interest income | | $ | 375,762 | | | $ | — | | | $ | 7,980 | | | $ | 383,742 | | | $ | 207,725 | | | $ | — | | | $ | 7,454 | | | $ | 215,179 | |
Noninterest income | | 74,697 | | | 38,824 | | | 32,818 | | | 146,339 | | | 57,175 | | | 36,707 | | | 30,473 | | | 124,355 | |
Total external customer revenues | | 450,459 | | | 38,824 | | | 40,798 | | | 530,081 | | | 264,900 | | | 36,707 | | | 37,927 | | | 339,534 | |
Inter-segment revenues: | | | | | | | | | | | | | | | | | | |
Interest income | | 9,992 | | | — | | | 13,649 | | | 23,641 | | | 10,535 | | | — | | | 8,053 | | | 18,588 | |
Noninterest income | | 6,522 | | | 626 | | | 717 | | | 7,865 | | | 6,449 | | | 581 | | | 107 | | | 7,137 | |
Total inter-segment revenues | | 16,514 | | | 626 | | | 14,366 | | | 31,506 | | | 16,984 | | | 581 | | | 8,160 | | | 25,725 | |
Total revenue | | 466,973 | | | 39,450 | | | 55,164 | | | 561,587 | | | 281,884 | | | 37,288 | | | 46,087 | | | 365,259 | |
External customer expenses: | | | | | | | | | | | | | | | | | | |
Interest expense | | 52,474 | | | — | | | 3,889 | | | 56,363 | | | 31,563 | | | — | | | 1,816 | | | 33,379 | |
Noninterest expenses | | 267,138 | | | 26,055 | | | 21,808 | | | 315,001 | | | 126,862 | | | 23,357 | | | 13,478 | | | 163,697 | |
Provision for loan losses | | 23,479 | | | — | | | 491 | | | 23,970 | | | 9,721 | | | — | | | 143 | | | 9,864 | |
Total external customer expenses | | 343,091 | | | 26,055 | | | 26,188 | | | 395,334 | | | 168,146 | | | 23,357 | | | 15,437 | | | 206,940 | |
Inter-segment expenses: | | | | | | | | | | | | | | | | | | |
Interest expense | | 13,649 | | | 6,491 | | | 3,501 | | | 23,641 | | | 8,053 | | | 7,460 | | | 3,075 | | | 18,588 | |
Noninterest expenses | | 1,343 | | | 1,923 | | | 4,599 | | | 7,865 | | | 688 | | | 1,936 | | | 4,513 | | | 7,137 | |
Total inter-segment expenses | | 14,992 | | | 8,414 | | | 8,100 | | | 31,506 | | | 8,741 | | | 9,396 | | | 7,588 | | | 25,725 | |
Total expenses | | 358,083 | | | 34,469 | | | 34,288 | | | 426,840 | | | 176,887 | | | 32,753 | | | 23,025 | | | 232,665 | |
Income before taxes | | $ | 108,890 | | | $ | 4,981 | | | $ | 20,876 | | | $ | 134,747 | | | $ | 104,997 | | | $ | 4,535 | | | $ | 23,062 | | | $ | 132,594 | |
Income tax provision | | | | | | | | 32,253 | | | | | | | | | 27,569 | |
Consolidated net income | | | | | | | | 102,494 | | | | | | | | | 105,025 | |
Net loss attributable to noncontrolling interest | | | | | | | | (611) | | | | | | | | | — | |
Net income attributable to WSFS | | | | | | | | 103,105 | | | | | | | | | 105,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | | | | | | | Six Months Ended June 30, 2019 | | | | | | |
(Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Income | | | | | | | | | | | | | | | | |
External customer revenues: | | | | | | | | | | | | | | | | |
Interest income | | $ | 255,019 | | | $ | — | | | $ | 4,719 | | | $ | 259,738 | | | $ | 237,177 | | | $ | — | | | $ | 5,303 | | | $ | 242,480 | |
Noninterest income | | 62,376 | | | 20,687 | | | 22,159 | | | 105,222 | | | 36,134 | | | 25,757 | | | 22,102 | | | 83,993 | |
Total external customer revenues | | 317,395 | | | 20,687 | | | 26,878 | | | 364,960 | | | 273,311 | | | 25,757 | | | 27,405 | | | 326,473 | |
Inter-segment revenues: | | | | | | | | | | | | | | | | |
Interest income | | 2,880 | | | 237 | | | 5,291 | | | 8,408 | | | 7,137 | | | — | | | 8,057 | | | 15,194 | |
Noninterest income | | 6,449 | | | 417 | | | 520 | | | 7,386 | | | 4,039 | | | 369 | | | 397 | | | 4,805 | |
Total inter-segment revenues | | 9,329 | | | 654 | | | 5,811 | | | 15,794 | | | 11,176 | | | 369 | | | 8,454 | | | 19,999 | |
Total revenue | | 326,724 | | | 21,341 | | | 32,689 | | | 380,754 | | | 284,487 | | | 26,126 | | | 35,859 | | | 346,472 | |
External customer expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 28,406 | | | — | | | 1,426 | | | 29,832 | | | 33,418 | | | — | | | 2,516 | | | 35,934 | |
Noninterest expenses | | 152,874 | | | 14,636 | | | 14,421 | | | 181,931 | | | 173,992 | | | 16,923 | | | 14,525 | | | 205,440 | |
Provision for credit losses | | 148,853 | | | — | | | 2,547 | | | 151,400 | | | 19,525 | | | — | | | 324 | | | 19,849 | |
Total external customer expenses | | 330,133 | | | 14,636 | | | 18,394 | | | 363,163 | | | 226,935 | | | 16,923 | | | 17,365 | | | 261,223 | |
Inter-segment expenses: | | | | | | | | | | | | | | | | |
Interest expense | | 5,528 | | | 1,085 | | | 1,795 | | | 8,408 | | | 8,057 | | | 4,761 | | | 2,376 | | | 15,194 | |
Noninterest expenses | | 937 | | | 1,640 | | | 4,809 | | | 7,386 | | | 766 | | | 1,243 | | | 2,796 | | | 4,805 | |
Total inter-segment expenses | | 6,465 | | | 2,725 | | | 6,604 | | | 15,794 | | | 8,823 | | | 6,004 | | | 5,172 | | | 19,999 | |
Total expenses | | 336,598 | | | 17,361 | | | 24,998 | | | 378,957 | | | 235,758 | | | 22,927 | | | 22,537 | | | 281,222 | |
(Loss) income before taxes | | $ | (9,874) | | | $ | 3,980 | | | $ | 7,691 | | | $ | 1,797 | | | $ | 48,729 | | | $ | 3,199 | | | $ | 13,322 | | | $ | 65,250 | |
Income (benefit) tax provision | | | | | | | | (959) | | | | | | | | | 16,351 | |
Consolidated net income | | | | | | | | 2,756 | | | | | | | | | 48,899 | |
Net loss attributable to noncontrolling interest | | | | | | | | (1,060) | | | | | | | | | (324) | |
Net income attributable to WSFS | | | | | | | | 3,816 | | | | | | | | | 49,223 | |
The following table shows significant components of segment net assets as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | September 30, 2019 | | | December 31, 2018 | | | | June 30, 2020 | | | December 31, 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | (Dollars in thousands) | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total | | WSFS Bank | | Cash Connect® | | Wealth Management | | Total |
Statements of Financial Condition | Statements of Financial Condition | | | | | | | | | | | | | | | | | Statements of Financial Condition | | | | | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 255,440 | | | $ | 313,964 | | | $ | 10,895 | | | $ | 580,299 | | | $ | 115,147 | | | $ | 491,863 | | | $ | 13,747 | | | $ | 620,757 | | Cash and cash equivalents | | $ | 591,518 | | | $ | 356,785 | | | $ | 7,464 | | | $ | 955,767 | | | $ | 202,792 | | | $ | 357,494 | | | $ | 11,466 | | | $ | 571,752 | |
Goodwill | Goodwill | | 452,759 | | | — | | | 20,199 | | | 472,958 | | | 145,808 | | | — | | | 20,199 | | | 166,007 | | Goodwill | | 452,629 | | | — | | | 20,199 | | | 472,828 | | | 452,629 | | | — | | | 20,199 | | | 472,828 | |
Other segment assets | Other segment assets | | 10,985,960 | | | 6,411 | | | 227,045 | | | 11,219,416 | | | 6,225,820 | | | 7,743 | | | 228,543 | | | 6,462,106 | | Other segment assets | | 11,914,250 | | | 5,171 | | | 225,341 | | | 12,144,762 | | | 10,982,681 | | | 6,555 | | | 222,486 | | | 11,211,722 | |
Total segment assets | Total segment assets | | $ | 11,694,159 | | | $ | 320,375 | | | $ | 258,139 | | | $ | 12,272,673 | | | $ | 6,486,775 | | | $ | 499,606 | | | $ | 262,489 | | | $ | 7,248,870 | | Total segment assets | | $ | 12,958,397 | | | $ | 361,956 | | | $ | 253,004 | | | $ | 13,573,357 | | | $ | 11,638,102 | | | $ | 364,049 | | | $ | 254,151 | | | $ | 12,256,302 | |
Capital expenditures | | $ | 9,160 | | | $ | 1,411 | | | $ | 130 | | | $ | 10,701 | | | $ | 4,779 | | | $ | 375 | | | $ | 344 | | | $ | 5,498 | | |
Capital expenditures for the period ended | | Capital expenditures for the period ended | | $ | 2,437 | | | $ | 256 | | | $ | 137 | | | $ | 2,830 | | | $ | 11,806 | | | $ | 2,120 | | | $ | 272 | | | $ | 14,198 | |
17. INDEMNIFICATIONS16. COMMITMENTS AND GUARANTEESCONTINGENCIES
Secondary Market Loan Sales
Given the current interest rate environment and ourthe Company's overall asset and liability management approach, wethe Company typically sellsells newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to government sponsored entities (GSEs) such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on ourthe unaudited Consolidated Statements of Financial Condition at fair value with changes in the value reflected in ourthe unaudited Consolidated Statements of Income. Gains and losses are recognized at the time of sale. WeThe Company periodically retainretains the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in our intangible assets in ourthe unaudited Consolidated Statements of Financial Condition. Otherwise, we sellthe Company sells loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that we intendthe Company intends to sell in the secondary market are accounted for as derivatives under ASC 815, Derivatives and Hedging (ASC 815).
We doThe Company does not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and 0 provision is made for losses at the time of sale. There waswere 0 repurchases during the six months ended June 30, 2020 as compared to 1 repurchase for $0.2 million during the ninesix months ended SeptemberJune 30, 2019.
Swap Guarantees
WeThe Company entered into agreements with 54 unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) directly with customers referred to them by us.the Company. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction, only in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives. derivatives.
At SeptemberJune 30, 20192020 and December 31, 2018,2019, there were 158213 and 136172 variable-rate to fixed-rate swap transactions between the third partythird-party financial institutions and ourthe Company's customers, respectively. The initial notional aggregate amount was approximately $769.4 million$1.1 billion at SeptemberJune 30, 20192020 compared to $581.5$941.0 million at December 31, 2018.2019. At SeptemberJune 30, 2019,2020, maturities ranged from under 1 year to 15 years. The aggregate net market value of these swaps to the customers was a liability of $33.7$91.7 million at SeptemberJune 30, 20192020 and a liability of $0.3$26.4 million at December 31, 2018.2019. At SeptemberJune 30, 2019, 1472020, 211 swaps, with a liability of $34.7$93.0 million, were in paying positions to a third party. We had 0 reservesparty; however, none of the Company's customers were in default of the swap agreements. There were no payments made by the Company under the agreements for these swap guarantees as of Septemberthe three and six months ended June 30, 2020 and June 30, 2019.
Unfunded Lending Commitments
At June 30, 2020 and December 31, 2019, the allowance for credit losses of unfunded lending commitments were $7.8 million and $1.5 million, respectively. The balance at June 30, 2020 was determined using the CECL methodology, which included a $3.0 million adjustment to retained earnings at the time of adoption. A provision for unfunded lending commitments of $3.4 million and $3.3 million was recognized during the three and six months ended June 30, 2020, respectively, and a provision for unfunded lending commitments of $0.3 million and $0.4 million was recognized during the three and six months ended June 30, 2019, respectively.
18.17. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes unrealized gains and losses on available-for-sale investments, unrealized gains and losses on cash flow hedges, as well as unrecognized prior service costs, transition costs, and actuarial gains and losses on defined benefit pension plans. Changes to accumulated other comprehensive lossincome are presented, net of tax, as a component of stockholders’ equity. Amounts that are reclassified out of accumulated other comprehensive lossincome are recorded on the unaudited Consolidated Statement of Income either as a gain or loss.
Changes to accumulated other comprehensive lossincome by component are shown, net of taxes, in the following tables for the period indicated:
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(Dollars in thousands) | | Net change in investment securities available for sale | | Net change in investment securities held to maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges | | Total |
Balance, June 30, 2019 | | $ | 22,244 | | | $ | 602 | | | $ | 659 | | | $ | (817) | | | $ | 22,688 | |
Other comprehensive income (loss) before reclassifications | | 9,268 | | | (1) | | | (8) | | | 368 | | | 9,627 | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | — | | | (69) | | | (27) | | | — | | | (96) | |
Net current-period other comprehensive income (loss) | | 9,268 | | | (70) | | | (35) | | | 368 | | | 9,531 | |
Balance, September 30, 2019 | | $ | 31,512 | | | $ | 532 | | | $ | 624 | | | $ | (449) | | | $ | 32,219 | |
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Balance, June 30, 2018 | | $ | (24,186) | | | $ | 987 | | | $ | 894 | | | $ | (3,408) | | | $ | (25,713) | |
Other comprehensive (loss) income before reclassifications | | (6,042) | | | — | | | 7 | | | (109) | | | (6,144) | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | — | | | (107) | | | (37) | | | — | | | (144) | |
Net current-period other comprehensive (loss) income | | (6,042) | | | (107) | | | (30) | | | (109) | | | (6,288) | |
Balance, September 30, 2018 | | $ | (30,228) | | | $ | 880 | | | $ | 864 | | | $ | (3,517) | | | $ | (32,001) | |
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(Dollars in thousands) | | Net change in investment securities available-for-sale | | Net change in investment securities held-to-maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges | | Total |
Balance, March 31, 2020 | | $ | 72,436 | | | $ | 403 | | | $ | (3,313) | | | $ | 1,008 | | | $ | 70,534 | |
Other comprehensive income (loss) before reclassifications | | 3,703 | | | — | | | 7 | | | (25) | | | 3,685 | |
Less: Amounts reclassified from accumulated other comprehensive income (loss) | | (1,450) | | | (57) | | | 179 | | | (111) | | | (1,439) | |
Net current-period other comprehensive income (loss) | | 2,253 | | | (57) | | | 186 | | | (136) | | | 2,246 | |
Balance, June 30, 2020 | | $ | 74,689 | | | $ | 346 | | | $ | (3,127) | | | $ | 872 | | | $ | 72,780 | |
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Balance, March 31, 2019 | | $ | 2,701 | | | $ | 686 | | | $ | 693 | | | $ | (1,824) | | | $ | 2,256 | |
Other comprehensive income before reclassifications | | 19,591 | | | — | | | 10 | | | 1,007 | | | 20,608 | |
Less: Amounts reclassified from accumulated other comprehensive income | | (48) | | | (84) | | | (44) | | | — | | | (176) | |
Net current-period other comprehensive income (loss) | | 19,543 | | | (84) | | | (34) | | | 1,007 | | | 20,432 | |
Balance, June 30, 2019 | | $ | 22,244 | | | $ | 602 | | | $ | 659 | | | $ | (817) | | | $ | 22,688 | |
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(Dollars in thousands) | | Net change in investment securities available for sale | | Net change in investment securities held to maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges | | Total |
Balance, December 31, 2019 | | $ | 26,927 | | | $ | 468 | | | $ | (3,317) | | | $ | (577) | | | $ | 23,501 | |
Other comprehensive income before reclassifications | | 49,739 | | | — | | | 43 | | | 1,560 | | | 51,342 | |
Less: Amounts reclassified from accumulated other comprehensive income | | (1,977) | | | (122) | | | 147 | | | (111) | | | (2,063) | |
Net current-period other comprehensive income (loss) | | 47,762 | | | (122) | | | 190 | | | 1,449 | | | 49,279 | |
Balance, June 30, 2020 | | $ | 74,689 | | | $ | 346 | | | $ | (3,127) | | | $ | 872 | | | $ | 72,780 | |
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Balance, December 31, 2018 | | $ | (14,553) | | | $ | 779 | | | $ | 834 | | | $ | (2,454) | | | $ | (15,394) | |
Other comprehensive income (loss) before reclassifications | | 36,856 | | | (2) | | | (89) | | | 1,637 | | | 38,402 | |
Less: Amounts reclassified from accumulated other comprehensive income (loss) | | (59) | | | (175) | | | (86) | | | — | | | (320) | |
Net current-period other comprehensive income (loss) | | 36,797 | | | (177) | | | (175) | | | 1,637 | | | 38,082 | |
Balance, June 30, 2019 | | $ | 22,244 | | | $ | 602 | | | $ | 659 | | | $ | (817) | | | $ | 22,688 | |
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(Dollars in thousands) | | Net change in investment securities available for sale | | Net change in investment securities held to maturity | | Net change in defined benefit plan | | Net change in fair value of derivatives used for cash flow hedges | | Total |
Balance, December 31, 2018 | | $ | (14,553) | | | $ | 779 | | | $ | 834 | | | $ | (2,454) | | | $ | (15,394) | |
Other comprehensive income (loss) before reclassifications | | 46,124 | | | (2) | | | (131) | | | 2,005 | | | 47,996 | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | (59) | | | (245) | | | (79) | | | — | | | (383) | |
Net current-period other comprehensive income (loss) | | 46,065 | | | (247) | | | (210) | | | 2,005 | | | 47,613 | |
Balance, September 30, 2019 | | $ | 31,512 | | | $ | 532 | | | $ | 624 | | | $ | (449) | | | $ | 32,219 | |
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Balance, December 31, 2017 | | $ | (7,842) | | | $ | 1,223 | | | $ | 865 | | | $ | (2,398) | | | $ | (8,152) | |
Other comprehensive (loss) income before reclassifications | | (22,370) | | | — | | | 15 | | | (1,119) | | | (23,474) | |
Less: Amounts reclassified from accumulated other comprehensive (loss) income | | (16) | | | (343) | | | (16) | | | — | | | (375) | |
Net current-period other comprehensive (loss) income | | (22,386) | | | (343) | | | (1) | | | (1,119) | | | (23,849) | |
Balance, September 30, 2018 | | $ | (30,228) | | | $ | 880 | | | $ | 864 | | | $ | (3,517) | | | $ | (32,001) | |
The unaudited Consolidated Statements of Income were impacted by components of other comprehensive income (loss) as shown in the tabletables below:
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| | Three Months Ended September 30, | | | | Affected line item in unaudited Consolidated Statements of Income |
(Dollars in thousands) | | 2019 | | 2018 | | |
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Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (91) | | | $ | (142) | | | Interest and dividends on investment securities |
Income taxes | | 22 | | | 35 | | | Income tax provision |
Net of tax | | $ | (69) | | | $ | (107) | | | |
Amortization of Defined Benefit Pension items: | | | | | | |
Prior service costs (credits) (1) | | $ | (19) | | | $ | (19) | | | |
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Actuarial gains | | (16) | | | (11) | | | |
Total before tax | | $ | (35) | | | $ | (30) | | | Salaries, benefits and other compensation |
Income taxes | | 8 | | | (7) | | | Income tax provision |
Net of tax | | (27) | | | (37) | | | |
Total reclassifications | | $ | (96) | | | $ | (144) | | | |
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| | Nine Months Ended September 30, | | | | Affected line item in unaudited Consolidated Statements of Income |
(Dollars in thousands) | | 2019 | | 2018 | | |
Securities available for sale: | | | | | | |
Realized gains on securities transactions | | $ | (78) | | | $ | (21) | | | Securities gains, net |
Income taxes | | 19 | | | 5 | | | Income tax provision |
Net of tax | | $ | (59) | | | $ | (16) | | | |
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (322) | | | $ | (451) | | | Interest and dividends on investment securities |
Income taxes | | 77 | | | 108 | | | Income tax provision |
Net of tax | | $ | (245) | | | $ | (343) | | | |
Amortization of Defined Benefit Pension items: | | | | | | |
Prior service costs (credits) (1) | | $ | (57) | | | $ | 21 | | | |
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Actuarial gains | | (47) | | | (34) | | | |
Total before tax | | $ | (104) | | | $ | (13) | | | Salaries, benefits and other compensation |
Income taxes | | 25 | | | (3) | | | Income tax provision |
Net of tax | | (79) | | | (16) | | | |
Total reclassifications | | $ | (383) | | | $ | (375) | | | |
(1)Prior service costs balance for the nine months ended September 30, 2018 includes a tax true-up adjustment of $0.1 million from March 31, 2018. Note that the tax true-up was made to the deferred tax asset with an offset to AOCI and does not affect the actual net periodic benefit costs of the pension plan.
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| | Three Months Ended June 30, | | | | Affected line item in unaudited Consolidated Statements of Income |
(Dollars in thousands) | | 2020 | | 2019 | | |
Securities available for sale: | | | | | | |
Realized gains on securities transactions | | $ | (1,908) | | | $ | (63) | | | Securities gains, net |
Income taxes | | 458 | | | 15 | | | Income tax provision |
Net of tax | | $ | (1,450) | | | $ | (48) | | | |
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (75) | | | $ | (111) | | | Interest and dividends on investment securities |
Income taxes | | 18 | | | 27 | | | Income tax provision |
Net of tax | | $ | (57) | | | $ | (84) | | | |
Amortization of defined benefit pension plan-related items: | | | | | | |
Prior service credits | | $ | (19) | | | $ | (19) | | | |
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Actuarial gains | | (24) | | | (16) | | | |
Total before tax | | $ | (43) | | | $ | (35) | | | Salaries, benefits and other compensation |
Income taxes | | 10 | | | (9) | | | Income tax provision |
Net of tax | | $ | (33) | | | $ | (44) | | | |
Defined benefit pension plan settlement: | | | | | | |
Realized losses on plan settlement | | $ | 279 | | | $ | — | | | Other operating expense |
Income taxes | | (67) | | | — | | | Income tax provision |
Net of tax | | $ | 212 | | | $ | — | | | |
Net unrealized gains on terminated cash flow hedges: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (146) | | | $ | — | | | Interest and fees on loans and leases |
Income taxes | | 35 | | | — | | | Income tax provision |
Net of tax | | $ | (111) | | | $ | — | | | |
Total reclassifications | | $ | (1,439) | | | $ | (176) | | | |
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| | Six Months Ended | | | | Affected line item in unaudited Consolidated Statements of Operations |
| | June 30, | | | | |
| | 2020 | | 2019 | | |
Securities available-for-sale: | | | | | | |
Realized gains on securities transactions | | $ | (2,601) | | | $ | (78) | | | Securities gains, net |
Income taxes | | 624 | | | 19 | | | Income tax provision |
Net of tax | | $ | (1,977) | | | $ | (59) | | | |
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (160) | | | $ | (231) | | | Interest and dividends on investment securities |
Income taxes | | 38 | | | 56 | | | Income tax provision |
Net of tax | | $ | (122) | | | $ | (175) | | | |
Amortization of defined benefit pension plan-related items: | | | | | | |
Prior service credits | | $ | (38) | | | $ | (38) | | | |
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Actuarial gains | | (48) | | | (31) | | | |
Total before tax | | $ | (86) | | | $ | (69) | | | Salaries, benefits and other compensation |
Income taxes | | 21 | | | (17) | | | Income tax provision |
Net of tax | | $ | (65) | | | $ | (86) | | | |
Defined benefit pension plan settlement: | | | | | | |
Realized losses on plan settlement | | $ | 279 | | | $ | — | | | Other operating expense |
Income taxes | | (67) | | | — | | | Income tax provision |
Net of tax | | $ | 212 | | | $ | — | | | |
Net unrealized gains on terminated cash flow hedges: | | | | | | |
Amortization of net unrealized gains to income during the period | | $ | (146) | | | $ | — | | | Interest and fees on loans and leases |
Income taxes | | 35 | | | — | | | Income tax provision |
Net of tax | | $ | (111) | | | $ | — | | | |
Total reclassifications | | $ | (2,063) | | | $ | (320) | | | |
18. RELATED PARTY TRANSACTIONS
In the ordinary course of business, from time to time we enterthe Company enters into transactions with related parties, including, but not limited to, ourits officers and directors. These transactions are made on substantially the same terms and conditions, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other customers. They do not, in the opinion of management, involve greater than normal credit risk or include other features unfavorable to us.the Company. Any related party loans exceeding $0.5 million require review and approval by the Board of Directors. During the three and ninesix months ended SeptemberJune 30, 20192020, there were 1 and 2 loans respectively,originated to related parties exceeding $0.5 million, both of which were sold during the second quarter. During the three and six months ended June 30, 2019, there were 0 loans originated to related parties exceeding $0.5 million.
The outstanding balances of loans to related parties at SeptemberJune 30, 20192020 and December 31, 20182019 were $1.6$0.3 million and $1.2$1.0 million, respectively. Total deposits from related parties at SeptemberJune 30, 20192020 and December 31, 20182019 were $7.1$6.1 million and $5.4$4.9 million, respectively. During the thirdsecond quarter of 2019,2020, there were 2 new loans and credit line advances to related parties were $0.6totaling $1.1 million and repayments were less than $0.1$0.7 million.
20.19. LEGAL AND OTHER PROCEEDINGS
In accordance with the current accounting standards for loss contingencies, we establishthe Company establishes reserves for litigation-related matters that arise in the ordinary course of ourits business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, ourthe Company's defense of litigation claims may result in legal fees, which we expenseit expenses as incurred.
As previously disclosed, on February 27, 2018, wethe Company entered into a settlement agreement with Universitas Education, LLC (Universitas) to resolve arbitration claims related to services provided by Christiana Bank and Trust Company (CB&T) prior to its acquisition by WSFS in December 2010. In accordance with the litigation settlement, wethe Company paid Universitas $12.0 million to fully settle the claims. During the third quarter of 2018, WSFS recovered $7.9 million in settlement and legal costs from insurance carriers that provided coverage relating to the Universitas matter. WSFS is pursuing all of its rights and remedies to recover the remaining amounts relating to the Universitas proceeding, including the Universitas settlement payment, legal fees and related costs, by enforcing the indemnity right in the 2010 purchase agreement by which WSFS acquired CB&T.
In March 2017, Nature’s Healing Trust (NHT) filed a complaint against WSFS Bank in the Delaware Court of Chancery. NHT asserts that WSFS Bank failed to provide timely notice concerning the possible lapse of two life settlement policies (aggregate face amount of $6.3 million) held in the trust. NHT asserts claims against WSFS Bank for breach of contract, breach of fiduciary duty, and negligence, and seeks the face value of the policies. WSFS Bank disputes the factual allegations and denies liability. WSFS Bank has, in accordance with its normal procedures, notified its insurance carriers of a possible claim. WSFS Bank is vigorously defending itself in this matter and believes it has valid factual and legal defenses. The case is currently scheduled to go to trial during the first quarter of 2020.
There were 0 material changes or additions to other significant pending legal or other proceedings involving usthe Company other than those arising out of routine operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WSFS Financial Corporation (the Company or WSFS) is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). At $12.3$13.6 billion in assets and $20.2$20.8 billion in assets under management (AUM) and assets under administration (AUA), WSFS Bank is also the largest bank and trust company headquartered in the Delaware Valley. As a federal savings bank, which was formerly chartered as a state mutual savings bank, the Bank enjoys a broader scope of permissible activities than most other types of financial institutions. A fixture in the community, we have been in operation for more than 187188 years. In addition to our focus on stellar customer service, 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, 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.
We have fivesix consolidated subsidiaries: WSFS Bank, WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress) and, Christiana Trust Company of Delaware (Christiana Trust DE). and WSFS SPE Services, LLC. We also have one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has fourthree wholly owned subsidiaries: Beneficial Equipment Finance Corporation (BEFC), WSFS Investment Group, Inc. (WSFS Wealth Investments), and 1832 Holdings, Inc., and WSFS SPE Services, LLC, and one majority-owned subsidiary, NewLane Finance Company (NewLane Finance).
Our core banking business is commercial lendinghad a total loan portfolio of $9.4 billion, as of June 30, 2020, which was funded primarily by customer-generatedthrough commercial relationships and retail and customer generated deposits. We have built a $6.3$7.3 billion commercial loan and lease portfolio by recruiting seasoned commercial lenders in our markets, offering the high level of service and flexibility typically associated with a community bank, and through acquisition. We fund this business primarily with deposits generated through commercial relationships and retail deposits. As of September 30, 2019, we service our customers primarily from 127 offices located in Pennsylvania (56), Delaware (49), New Jersey, (20), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. 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 through our branches and Pennsylvania-based WSFS Mortgage. WSFS Mortgage is a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions.
Our leasing business is conducted by NewLane Finance (formerly Neumann Finance Company). During the third quarter of 2019, the leasing operations of NewLane Finance and BEFC were combined and all new leases are now originated at 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.
Our Cash Connect® segmentbusiness is a premier U.S. 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. Cash Connect® manages over $1.1$1.4 billion in total cash and services over 27,400approximately 27,900 non-bank ATMs and approximately 2,9004,100 smart safes nationwide. Cash Connect® provides related services such as online reporting and ATM cash management, predictive cash ordering and reconcilement services, armored carrier management, loss protection, ATM processing equipment sales and deposit safe cash logistics. Cash Connect® also operates 477supports 571 branded ATMs for theWSFS Bank Customers, which has one of the largest branded ATM networks in our market.
As a provider of ATM vault cash to the U.S. ATM industry, Cash Connect® is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 19 year history, Cash Connect® periodically has been exposed to losses through theft from armored courier companies and consistently has been able to recover losses through its risk management strategies.
Our Wealth Management segmentbusiness 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 $20.220.8 billion of assets under management (AUM)AUM and assets under administration (AUA)AUA at SeptemberJune 30, 2019.2020. 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 institutional trust division of WSFS, (doing business as WSFS Institutional Services)Services, provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients. The personal trust divisionChristiana Trust DE, a subsidiary of WSFS, (doing business as Christiana Trust) provides personal trust and fiduciary services to families and individuals.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 units to provide comprehensive solutions to clients.
As a provider of trust services to our clients, we are exposed to operational, reputation-related and legal risks due to the inherent complexity of the trust business. To mitigate these risks, we rely on the hiring, development and retention of experienced Associates, financial controls, managerial oversight, and other risk management practices. Also, from time to time our trust business may give rise to disputes with clients and we may be exposed to litigation which could result in significant costs. The ultimate outcome of any litigation is uncertain.
2019 Developments
On March 1, 2019, we acquired Beneficial Bancorp, Inc. (Beneficial), including its subsidiary Beneficial Bank. Subject to the terms and conditions of the Merger Agreement, stockholders of Beneficial received 0.3013 shares of WSFS common stock and $2.93 in cash for each share of Beneficial common stock. See Note 3 to the unaudited Consolidated Financial Statements for further information.
During the second quarter, we completed the sale of five Beneficial Bank retail banking offices in New Jersey, with approximately $177.9 million in deposits to The Bank of Princeton, a New Jersey-based financial institution, at a deposit premium of 7.37%. The sale was part of a previously announced branch optimization plan to consolidate and divest 30 retail banking offices, or 25%, of the combined WSFS and Beneficial branch network.
During the third quarter, we completed the systems integration and rebranding of Beneficial Bank, and all Beneficial Bank accounts have successfully converted to WSFS Bank accounts. Most of the consolidations from the branch optimization plan were completed during the conversion and rebranding of the remaining Beneficial banking offices. All legacy Beneficial customers have full access to WSFS services and solutions, including more than 90 retail banking offices across Delaware, the City of Philadelphia, southeastern Pennsylvania, and southern New Jersey, and a network of nearly 500 WSFS ATMs.
As of June 30, 2020, we service our customers primarily from 115 offices located in Pennsylvania (54), Delaware (43), New Jersey, (16), Virginia (1) and Nevada (1), our ATM network, our website at www.wsfsbank.com and our mobile app.
Recent Developments and Business Outlook
Our results during the first half of 2020 were significantly impacted by the COVID-19 pandemic and its impact on the economic forecasts that drive the estimates we use to determine the provision for credit losses. Contributing to the magnitude of the pandemic's effect is our adoption, as of January 1, 2020, of, the Current Expected Credit Loss (CECL) method of accounting, which considers forward-looking information when establishing reserves for credit losses. Results during the first half of 2020 and other notable items include the following:
•The COVID-19 pandemic resulted in acute deterioration in the economic forecast used in our CECL modeling, resulting in additional provision for credit losses of $94.8 million and $151.4 million for the three and six months ended June 30, 2020, and an increase of $93.1 million and $184.6 million to the allowance for credit losses during the three and six months ended June 30, 2020. During the three months ended June 30, 2020, we also recorded $1.9 million of other COVID-19 related costs.
•WSFS recorded net realized gains on our equity investments of $22.1 million from the sale of 360,000 Visa Class B shares. Since our adoption of ASU 2016-01 in 1Q 2018, cumulative realized and unrealized gains and dividends on Visa Class B shares total $78.0 million.
•WSFS made a $3.0 million grant to the WSFS Community Foundation to address the impacts of COVID-19 on the communities we serve and provide long-term support for education, health and human services, and economic development in our communities.
•We began participating in some of the regulatory relief programs offered as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Paycheck Protection Program (PPP). During the second quarter of 2020, we provided nearly $1.0 billion in PPP loans for more than 5,400 new and existing WSFS Customers, supporting an estimated 100,000 jobs in our region. During the six months ended June 30, 2020, we also recorded $1.8 million of PPP related costs. See "Recent Regulatory Developments" for further details.
•During March 2020, we began a phased approach to our retail office closures and our retail branch offices only accepted drive-thru services. During the second quarter of 2020, nearly two-thirds of our retail offices were servicing customers. The retail office closures have not significantly impacted our financial condition and results of operations, as our customer deposits remain intact and the fees and costs associated with our customer deposits remain under normal business operations. We continue to serve Customers through drive-thru locations and have begun a carefully planned and phased approach to opening previously closed office and banking locations that aligns with Federal, State and local guidance.
•During the second quarter of 2020, and subsequent to June 30, 2020, Cash Connect® expanded its ATM network by adding over 150 ATMs to serve Delaware and the greater Philadelphia region. The number of owned and branded ATMs increased to 571 as of June 30, 2020, and to approximately 640 in the third quarter of 2020, through the date of this Quarterly Report on Form 10-Q.
For a discussion of additional risk factors relating to COVID-19, see "Item 1A. Risk Factors."
Looking ahead, the continuation of the economic effects of COVID-19 and actions taken in response to it, including the impacts of loan forbearances and other provisions of the CARES Act and other federal and state measures, may adversely impact our business and results of operations and the operations of our borrowers, customers and business partners.The uncertainty regarding the duration of the pandemic and the resulting economic disruption has caused increased market volatility and has led to an economic recession and a significant decrease in consumer confidence and business generally.The continuation of these conditions (including whether due to a resurgence or a second wave of COVID-19 infections, particularly as the geographic areas in which we operate begin to re-open) and their ultimate impact of these factors is highly uncertain at this time and we do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the decline in economic conditions generally and a prolonged negative impact on small to medium sized businesses, in particular, due to COVID-19 may result in an adverse effect to our business, financial condition and results of operations.For more information about these risks and uncertainties, see “Item 1A. Risk Factors.”
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $5.0$1.3 billion to $12.3$13.6 billion at SeptemberJune 30, 20192020 compared to December 31, 2018. 2019. This increase is primarily comprised of the following (in descending order of magnitude):
•Net loans, excluding loans held for sale, increased $3.6 billion$695.8 million which includes $3.5 billionincluded:
◦An increase of $945.1 million from PPP loans acquired from Beneficial (balance as of September 30, 2019). Excluding loans acquired from Beneficial, loans increased $167.6 million, reflecting increases of $66.5 million in consumer loans, $64.2 million in commercial and industrial (C&I loans), $57.8 million in residential mortgages, and $29.2 million ingrowth across CRE, construction, commercial small business leases, partially offset by decreasesand home equity installment loans originated through our partnership with Spring EQ.
◦A decline during the year of $38.9$371.0 million in commercial real estate loansnon-relationship run-off portfolios primarily acquired from the Beneficial Bancorp, Inc. (Beneficial) acquisition; and $11.2 million in construction loans. Investment securities increased $688.8
◦Total provision for credit losses of $151.4 million during the ninesix months ended SeptemberJune 30, 2019, primarily the result of our ongoing balance sheet optimization related to our acquisition of Beneficial. Goodwill and intangible assets increased $385.8 million during the nine months ended September 30, 2019, due to our acquisition of Beneficial. Other assets increased $192.3 million during the nine months ended September 30, 2019, primarily due to a $166.0 million right-of-use asset recorded2020 due to the adoptionimpact of ASU 2016-02, the COVID-19 pandemic, significant deterioration in economic forecasts and portfolio credit migration.
•Leases. Additionally, Other investmentsCash and cash equivalents increased $32.8$384.0 million, during the nine months ended September 30, 2019, primarily reflecting excess cash held due to unrealized gains of $26.2 million on our Visa Class B sharesincreased deposits related to PPP loans and our investment in Spring EQ, in addition to equity investments acquired from Beneficial. Bank Owned Life Insurance (BOLI) increased $24.4 million during the nine months ended September 30, 2019, primarily reflecting the value of retained split-dollar BOLI policies acquired from Beneficial. These increases were partiallyCARES Act payments, offset by a decrease of $40.5 million in cash and cash equivalents, which primarily reflected a decline of $162.1$46.6 million from improved cash optimization at Cash Connect® due to utilizingan increased use of external funding sources to support the bailment, cash management and smart safe lines of business. The decreasebusiness offset by changes in seasonality.
•Investment securities increased $244.5 million during the six months ended June 30, 2020 primarily due to cash optimization was$535.1 million in purchases and favorable market-value changes on available-for-sale securities of $47.8 million, partially offset by an increaserepayments of $70.9$232.4 million and $26.7 millionsales of cash held with the Federal Reserve and from Beneficial, respectively.$107.0 million.
•Other investments decreased $59.8 million during the six months ended June 30, 2020 as we sold 360,000 Visa Class B shares.
Total liabilities increased $4.0$1.3 billion to $10.4$11.8 billion during the ninesix months ended SeptemberJune 30, 2020 compared to December 31, 2019. CustomerThese increases are primarily comprised of the following (in descending order of magnitude):
•Total deposits increased by $1.5 billion, primarily due to:
◦An increase of $1.4 billion in customer funding, increased $3.8reflecting an estimated $0.7 billion of deposits from Customers who received PPP loans, the impact of government stimulus checks, delayed tax payment and less customer spending during the nine months ended September 30, 2019, which includes $3.3 billionCOVID-19 pandemic. The ratio of customer funding acquired from Beneficial (balance as of September 30, 2019). Excluding the customer funding acquired from Beneficial,loans to customer deposits increased $524.2 million, primarilywas 86% at June 30, 2020 reflecting increasessignificant liquidity capacity; and
◦An increase of $400.2 million in no- and low-cost checking deposit accounts, $59.9 million in money market accounts, and $20.4 million in savings deposits. In addition, other liabilities increased $232.9 million during the nine months ended September 30, 2019, primarily due to a $181.0 million lease liability recorded due to the adoption of ASU 2016-02, Leases. Partially offsetting these increases during the nine months ended September 30, 2019 was a decrease in brokered deposits of $165.3 million, excluding $209.8$30.6 million in brokered deposits acquired from Beneficial. deposits.
•Federal funds purchased decreased $158.0$195.0 million during the nine months ended September 30, 2019 due to our ongoing balance sheet optimization related to our acquisition of Beneficial.the increase in customer funding, as described above.
For further information, see the Notes"Notes to the unaudited Consolidated Financial Statements."
Capital Resources
Share Repurchases: During the nine months ended September 30, 2019, WSFSfirst quarter of 2020, we repurchased 1,230,640$38.7 million, or 1,004,348 shares of common stock at an average price of $42.20$38.53 per share, as part ofcompleting our share buybackrepurchase program approved by the Board of Directors in the fourth quarter of 2018. WSFS has 1,906,338Also in the first quarter, the Board of Directors approved a new share purchase authorization of 7,594,977 shares, or 4%15% of outstanding shares, remaining to repurchase under this authorization. We continue to execute the Board-approved share buyback plan, including opportunistically repurchasing shares, based on current valuation levels, above our stated practice of returning a minimum of 25% of annual net income to stockholders through dividends and share repurchases.
Inshares. However, in the first quarter of 2019,2020, we repurchased $5.8 milliontemporarily suspended all share repurchases until we have a clearer long-term view of common stock in connection with the settlementimpact of outstanding stock based compensation awards held by Beneficial Associates at closing.COVID-19 on the economy and our performance.
Stockholders’ equity increased $1.0 billionof WSFS decreased $26.6 million between December 31, 20182019 and SeptemberJune 30, 2019.2020. This increasedecrease was primarily due to $38.7 million for repurchases of common stock under the previously announced stock repurchase plan, a $30.4 million impact to retained earnings due to the adoption of CECL, and the payment of dividends on our acquisitioncommon stock of Beneficial, but also reflects $103.1$12.2 million, of income attributable to WSFS and $46.1partially offset by $47.8 million from the effect of market-value changes on available-for-sale securities partially offset by the paymentand $3.8 million of dividends on our common stock of $16.2 million and $57.7 million for share repurchases, described above,income attributable to WSFS for the ninesix months ended SeptemberJune 30, 2019.2020.
The table below compares the Bank's and the Company’s consolidated capital positionDirectors approved a quarterly cash dividend of $0.12 per share of common stock. This dividend will be paid on August 20, 2020 to the minimum regulatory requirementsstockholders of record as of September 30, 2019:August 6, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated Capital | | | | For Capital Adequacy Purposes | | | | To be Well-Capitalized Under Prompt Corrective Action Provisions | | |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | $ | 1,368,610 | | | 13.50 | % | | $ | 810,887 | | | 8.00 | % | | $ | 1,013,609 | | | 10.00 | % |
WSFS Financial Corporation | | 1,392,133 | | | 13.72 | % | | 811,538 | | | 8.00 | % | | 1,014,423 | | | 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,319,095 | | | 13.01 | % | | 608,165 | | | 6.00 | % | | 810,887 | | | 8.00 | % |
WSFS Financial Corporation | | 1,342,618 | | | 13.24 | % | | 608,654 | | | 6.00 | % | | 811,538 | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,319,095 | | | 13.01 | % | | 456,124 | | | 4.50 | % | | 658,846 | | | 6.50 | % |
WSFS Financial Corporation | | 1,277,618 | | | 12.59 | % | | 456,490 | | | 4.50 | % | | 659,375 | | | 6.50 | % |
Tier 1 Leverage Capital | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,319,095 | | | 11.13 | % | | 473,964 | | | 4.00 | % | | 592,455 | | | 5.00 | % |
WSFS Financial Corporation | | 1,342,618 | | | 11.34 | % | | 473,724 | | | 4.00 | % | | 592,155 | | | 5.00 | % |
Book value per share of common stock was $35.41$36.00 at SeptemberJune 30, 2019,2020, an increase of $9.24, or 35%$0.12 from $26.17$35.88 at December 31, 2018.2019. Tangible book value per share of common stock (a non-GAAP financial measure) was $24.50$24.89 at SeptemberJune 30, 2019,2020, an increase of $4.26, or 21%,$0.04 from $20.24$24.85 at December 31, 2018.2019. We believe tangible common book value per common share helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP data should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a substitute for, or superior to, GAAP results. For a reconciliation of tangible common book value per common share to book value per share in accordance with GAAP, see "Reconciliation"Reconciliation of Non-GAAP Measure to GAAP Measure."
RegulatorsThe table below compares the Bank's and the Company’s consolidated capital position to the minimum regulatory requirements as of June 30, 2020:
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| | Consolidated Capital | | | | For Capital Adequacy Purposes | | | | To be Well-Capitalized Under Prompt Corrective Action Provisions | | |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | $ | 1,419,261 | | | 13.93 | % | | $ | 815,140 | | | 8.00 | % | | $ | 1,018,925 | | | 10.00 | % |
WSFS Financial Corporation | | 1,424,634 | | | 13.95 | % | | 817,201 | | | 8.00 | % | | 1,021,501 | | | 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,291,896 | | | 12.68 | % | | 611,355 | | | 6.00 | % | | 815,140 | | | 8.00 | % |
WSFS Financial Corporation | | 1,296,947 | | | 12.70 | % | | 612,901 | | | 6.00 | % | | 817,201 | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,291,896 | | | 12.68 | % | | 458,516 | | | 4.50 | % | | 662,301 | | | 6.50 | % |
WSFS Financial Corporation | | 1,231,947 | | | 12.06 | % | | 459,676 | | | 4.50 | % | | 663,976 | | | 6.50 | % |
Tier 1 Leverage Capital | | | | | | | | | | | | |
Wilmington Savings Fund Society, FSB | | 1,291,896 | | | 10.40 | % | | 496,826 | | | 4.00 | % | | 621,032 | | | 5.00 | % |
WSFS Financial Corporation | | 1,296,947 | | | 10.44 | % | | 497,092 | | | 4.00 | % | | 621,365 | | | 5.00 | % |
Under the prompt corrective action regime, regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends on its capital levels in relation to various relevant capital measures, which include leveraged and risk-based capital measures and certain other factors. 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.
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.
Not includedAs part of our adoption of CECL, we elected the Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations, which permits the Company to phase in the Bank’sday-one adverse effects on regulatory capital that may result from the Company separately held $130.9 million in cashadoption of CECL over a three-year period. In addition, the final rule revises the agencies' regulatory capital rule, stress testing rules, and regulatory disclosure requirements to support share repurchases, potential dividends, acquisitions, strategic growth plansreflect CECL, and makes conforming amendments to other general corporate purposes.regulations that reference allowance for credit losses.
As shown in the table above, as of SeptemberJune 30, 2019,2020, the Bank and the Company were in compliance with regulatory capital requirements and exceeded the amounts required to be considered “well-capitalized” as defined in the regulations.
Not included in the Bank’s capital, the Company separately held $97.2 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.
As a result of the three-year period phase-in related to our CECL adoption, the impact (by bps) to our capital ratios were as follows:
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| | June 30, 2020 | | | | |
(Dollars in thousands) | | As Reported | | Proforma(1) | | CECL Impact |
Total Capital (to Risk-Weighted Assets) | | | | | | |
Wilmington Savings Fund Society, FSB | | 13.93 | % | | 14.01 | % | | (0.08) | % |
WSFS Financial Corporation | | 13.95 | % | | 14.02 | % | | (0.07) | % |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | |
Wilmington Savings Fund Society, FSB | | 12.68 | % | | 12.76 | % | | (0.08) | % |
WSFS Financial Corporation | | 12.70 | % | | 12.77 | % | | (0.07) | % |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | |
Wilmington Savings Fund Society, FSB | | 12.68 | % | | 12.76 | % | | (0.08) | % |
WSFS Financial Corporation | | 12.06 | % | | 12.14 | % | | (0.08) | % |
Tier 1 Leverage Capital | | | | | | |
Wilmington Savings Fund Society, FSB | | 10.40 | % | | 10.46 | % | | (0.06) | % |
WSFS Financial Corporation | | 10.44 | % | | 10.49 | % | | (0.05) | % |
(1) Excludes the phase-in impact of CECL.
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.
We have ready access to several fundingFunding sources to fundsupport growth and meet our liquidity needs. Among these areneeds include cash from operations, retail deposit programs, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to meet our funding needs as well as maintain required and prudent levels of liquidity over the next twelve months.
During the ninesix months ended SeptemberJune 30, 2019,2020, cash and cash equivalents decreased $40.5increased $384.0 million to $580.3$955.8 million from $620.8$571.8 million as of December 31, 2018.2019. Cash provided by operating activities was $75.0$80.4 million, primarily reflecting the cash impact of earnings and gains of $24.7 million from the sale of debt and equity securities (including Visa Class B shares), offset by a $53.4$26.3 million increase in net activity for loans held for sale during the ninesix months ended SeptemberJune 30, 2019.2020. Additionally, to avoid limitations 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 on top of each of the risk-based capital ratios. Cash provided byused in investing activities was $260.6$0.9 billion due to $839.6 million which includedfrom increased lending activity related to PPP loans and net purchases of debt securities of $302.7 million, offset by proceeds of $602.5$109.6 million from sales of debt securities (including $578.8and net proceeds of $85.9 million from salesthe sale of securities acquired from Beneficial), $125.5 million from reduced lending activity, $76.1 millionVisa Class B shares. Cash provided in net cash acquired from Beneficial, $59.7 million received from the surrender of the majority of BOLI policies acquired from Beneficial and $19.8 million from net redemptions of FHLB stock. These proceeds were primarily offset by $629.4 million used for net purchases of investment securities as part of our balance sheet optimization. Cash used for financing activities was $376.1 million,$1.2 billion, primarily due to a $188.1 million$1.5 billion net decreaseincrease in deposits, $158.0as a result of the increase in customer funding discussed above, offset by $195.0 million for repayment of federal funds purchased, and $57.7$38.7 million for repurchases of common stock which includes $5.8 million ofunder the previously announced stock repurchase plan and common stock repurchased in connection with the settlementdividends of outstanding stock based compensation awards held by Beneficial Associates at closing. See Note 3 to the unaudited Consolidated Financial Statements for further information.$12.2 million.
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:indicated, which presents the portfolio segment totals at the amortized cost in accordance with our adoption of CECL at June 30, 2020, and at the unpaid principal balance under the incurred loss methodology at December 31, 2019:
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Nonaccruing loans: | Nonaccruing loans: | | | | | Nonaccruing loans: | | | | |
Commercial and industrial | Commercial and industrial | | $ | 21,007 | | | $ | 14,056 | | Commercial and industrial | | $ | 15,381 | | | $ | 11,031 | |
Owner-occupied commercial | Owner-occupied commercial | | 9,263 | | | 4,406 | | Owner-occupied commercial | | 4,212 | | | 4,060 | |
Commercial mortgages | Commercial mortgages | | 2,197 | | | 3,951 | | Commercial mortgages | | 1,148 | | | 1,626 | |
Construction | | — | | | 2,781 | | |
Residential mortgages | | 4,152 | | | 2,854 | | |
| Residential | | Residential | | 3,118 | | | 4,490 | |
Consumer | Consumer | | 1,799 | | | 2,006 | | Consumer | | 2,316 | | | 1,715 | |
Total nonaccruing loans | Total nonaccruing loans | | 38,418 | | | 30,054 | | Total nonaccruing loans | | 26,175 | | | 22,922 | |
Other real estate owned | Other real estate owned | | 3,693 | | | 2,668 | | Other real estate owned | | 4,153 | | | 2,605 | |
Restructured loans(1) | Restructured loans(1) | | 14,125 | | | 14,953 | | Restructured loans(1) | | 14,550 | | | 14,281 | |
Total nonperforming assets | Total nonperforming assets | | $ | 56,236 | | | $ | 47,675 | | Total nonperforming assets | | $ | 44,878 | | | $ | 39,808 | |
Past due loans: | Past due loans: | | | | | Past due loans: | | | | |
Commercial | Commercial | | $ | 1,517 | | | $ | 71 | | Commercial | | $ | 2,273 | | | $ | 2,968 | |
Residential mortgages | | 248 | | | 660 | | |
Residential | | Residential | | 175 | | | 437 | |
Consumer (2) | Consumer (2) | | 11,944 | | | 104 | | Consumer (2) | | 6,153 | | | 12,745 | |
Total past due loans | Total past due loans | | $ | 13,709 | | | $ | 835 | | Total past due loans | | $ | 8,601 | | | $ | 16,150 | |
Ratio of allowance for loan losses to total gross loans (3) | | 0.56 | % | | 0.81 | % | |
Ratio of allowance for loan losses to total gross loans (excluding acquired loans) | | 1.00 | | | 0.89 | | |
Ratio of nonaccruing loans to total gross loans (3) | | 0.45 | | | 0.62 | | |
Ratio of allowance for credit losses to total loans and leases(3) | | Ratio of allowance for credit losses to total loans and leases(3) | | 2.45 | % | | 0.56 | % |
| Ratio of nonaccruing loans to total gross loans and leases(4) | | Ratio of nonaccruing loans to total gross loans and leases(4) | | 0.28 | | | 0.27 | |
Ratio of nonperforming assets to total assets | Ratio of nonperforming assets to total assets | | 0.46 | | | 0.66 | | Ratio of nonperforming assets to total assets | | 0.33 | | | 0.32 | |
Ratio of allowance for loan losses to nonaccruing loans | | 124 | | | 132 | | |
Ratio of allowance for loan losses to total nonperforming assets(4) | | 85 | | | 83 | | |
Ratio of allowance for credit losses to nonaccruing loans | | Ratio of allowance for credit losses to nonaccruing loans | | 887 | | | 208 | |
Ratio of allowance for credit losses to total nonperforming assets(5) | | Ratio of allowance for credit losses to total nonperforming assets(5) | | 517 | | | 120 | |
(1)Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans.
(2)Includes U.S. government guaranteed student loans with little risk of credit lossloss.
(3)Represents amortized cost basis for loans, leases and held-to-maturity securities.
(4)Total loans exclude loans held for sale and reverse mortgages.
(4)(5)Excludes acquired impaired loans.
Nonperforming assets increased $8.6$5.1 million between December 31, 20182019 and SeptemberJune 30, 2019.2020. This increase included an $8.4was primarily the result of the move of one commercial relationship totaling approximately $7.3 million increase in nonaccruing loans, primarily due to the following that occurred during the second quarter of 2019: (i) one $20.2 million C&I relationship that was moved to nonperforming status,non-accrual, partially offset by (ii) two legacy WSFS C&I loans, previously classified as nonperforming, that experienced significant credit events,collection efforts, which resulted in higher levels of provision for loan lossesincludes both continued monthly payments and concurrent charge-offs. Restructured loans at September 30, 2019 were essentially flat as compared to December 31, 2018.a few modest payoffs. The ratio of nonperforming assets to total assets improved from 0.66% atwas relatively flat as compared to December 31, 2018 to 0.46% at September 30, 2019, primarily due to the larger combined balance sheet.2019.
The following table summarizes the changes in nonperforming assets during the periods indicated:
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 |
Beginning balance | Beginning balance | | $ | 47,675 | | | $ | 59,000 | | Beginning balance | | $ | 39,808 | | | $ | 47,675 | |
Additions | Additions | | 46,879 | | | 23,269 | | Additions | | 18,155 | | | 40,142 | |
Collections | Collections | | (20,491) | | | (18,531) | | Collections | | (8,171) | | | (16,637) | |
Transfers to accrual | Transfers to accrual | | (1,240) | | | (9) | | Transfers to accrual | | — | | | (1,120) | |
Charge-offs | Charge-offs | | (16,587) | | | (9,845) | | Charge-offs | | (4,914) | | | (14,518) | |
Ending balance | Ending balance | | $ | 56,236 | | | $ | 53,884 | | Ending balance | | $ | 44,878 | | | $ | 55,542 | |
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 utilizesuses guidelines established by federal regulation.
In response to the COVID-19 pandemic, the CARES Act was enacted to provide certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing and automatic forbearance. During the second quarter of 2020, through the date of this Quarterly Report on Form 10-Q, we modified approximately $2.1 billion of loans and leases to provide our customers this monetary relief, most of which was short-term in duration. These modified loans are not reflected in our nonperforming assets described above.
INTEREST RATE SENSITIVITY
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while maximizing the yield/cost spread on our asset/liability structure. We rely primarily on our asset/liability structure to control interest rate risk.
The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At SeptemberJune 30, 2019,2020, interest-earning assets exceeded interest-bearing liabilities exceeded interest-earning assets that mature or reprice within one year (interest-sensitive gap) by $347$942.9 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 91.64%117.92% at SeptemberJune 30, 20192020 compared with 98.67%95.02% at December 31, 2018.2019. Likewise, the one-year interest-sensitive gap as a percentage of total assets was (3.38)%6.95% at SeptemberJune 30, 20192020 compared with (0.57)(2.06)% at December 31, 2018. The lower one-year interest-sensitive gap along with a more neutral net interest margin resulted from the acquisition of Beneficial.2019.
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, which we are required to perform by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.
The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
% Change in Interest Rate (Basis Points) | % Change in Interest Rate (Basis Points) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) | % Change in Interest Rate (Basis Points) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) | | % Change in Net Interest Margin(1) | | Economic Value of Equity(2) |
+300 | +300 | | | 5.5% | | | 18.33% | | | 8.0% | | | 16.93% | | +300 | | 12.3% | | 17.83% | | 5.8% | | 18.97% |
+200 | +200 | | | 3.8% | | | 18.60% | | | 5.0% | | | 17.19% | | +200 | | 8.1% | | 17.32% | | 4.0% | | 19.18% |
+100 | +100 | | | 2.0% | | | 18.73% | | | 3.0% | | | 17.26% | | +100 | | 3.9% | | 16.51% | | 2.0% | | 19.23% |
+50 | +50 | | | 1.0% | | | 18.66% | | | 1.3% | | | 17.25% | | +50 | | 1.9% | | 15.99% | | 1.0% | | 19.14% |
+25 | +25 | | | 0.5% | | | 18.61% | | | 0.7% | | | 17.24% | | +25 | | 1.0% | | 15.70% | | 0.5% | | 19.06% |
— | — | | | —% | | | 18.54% | | | —% | | | 17.21% | | — | | —% | | 15.41% | | —% | | 18.97% |
-25 | -25 | | | (0.5)% | | | 18.45% | | | (0.7)% | | | 17.16% | | -25 | | (0.9)% | | 15.08% | | (0.5)% | | 18.85% |
-50 | -50 | | | (0.9)% | | | 18.36% | | | (1.5)% | | | 17.09% | | -50 | | (1.0)% | | 14.89% | | (0.9)% | | 18.72% |
-100 | -100 | | | (2.0)% | | | 18.08% | | | (4.0)% | | | 16.82% | | -100 | | (1.0)% | | 14.83% | | (2.4)% | | 18.30% |
-200 | | (4.5)% | | | 18.00% | | | (9.0)% | | | 15.87% | | |
'-200(3) | | '-200(3) | | NMF | | NMF | | NMF | | NMF |
-300(3) | -300(3) | | NMF | | | NMF | | NMF | | NMF | -300(3) | | NMF | | NMF | | NMF | | NMF |
(1)The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2)The economic value of equity ratio of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3)Sensitivity indicated by a decrease of 200 and 300 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates in the periods presented.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.
RESULTS OF OPERATIONS
Three months ended SeptemberJune 30, 2019:2020: For the three months ended SeptemberJune 30, 2019,2020, there was a net loss of $7.1 million compared to net income was $53.9 million compared with $38.9of $36.2 million for the three months ended SeptemberJune 30, 2018. 2019.
•Net interest income increased $57.7decreased $9.5 million during the three months ended SeptemberJune 30, 20192020 compared to the three months ended SeptemberJune 30, 2018,2019, primarily due to a lower interest rate environment and a decrease in purchase accounting accretion, partially offset by the positive impact of PPP income. See “Net Interest Income” for further information.
•Our provision for credit losses for the three months ended June 30, 2020 increased $82.6 million compared to the three months ended June 30, 2019, primarily due to the acquisition of BeneficialCOVID-19 pandemic and improved positioningits continued impact on the economic forecast used in our CECL modeling. The main drivers for the higher short-term interest rate environment overincreased provision for the last year.three months ended June 30, 2020 were loan migration that occurred during the quarter in several specific portfolios as well as additional deterioration in our economic forecast model. See “Net Interest Income”“Provision/Allowance for Credit Losses” for further information.
•Noninterest income for the three months ended SeptemberJune 30, 20192020 increased $20.4$21.5 million compared to the three months ended SeptemberJune 30, 2018,2019, primarily due to an increase in realized/unrealized gainsthe gain recognized on the sale of $14.3 million on our investments in Visa Class B shares. See “Noninterest (Fee) Income” for further information.
•Noninterest expense decreased $14.4 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, as net corporate development and restructuring costs related to our acquisition of Beneficial decreased by $13.0 million and other operating costs (which includes occupancy, equipment, data processing and operations expenses) decreased by $4.8 million, partially offset by an increase of $3.2 million for unfunded commitment reserves. See “Noninterest Expense” for further information.
Six months ended June 30, 2020: For the six months ended June 30, 2020, net income was $3.8 million compared to $49.2 million for the six months ended June 30, 2019.
•Net interest income increased $23.4 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a full six month impact of the Beneficial acquisition in the current period, in addition to the positive impact of PPP loans in the current quarter. See “Net Interest Income” for further information.
•Our provision for credit losses for the six months ended June 30, 2020 increased $131.6 million compared to the six months ended June 30, 2019, primarily due to the COVID-19 pandemic and its continued impact on the economic forecast used in our CECL modeling. See “Provision/Allowance for Credit Losses” for further information.
•Noninterest income for the six months ended June 30, 2020 increased $21.2 million compared to the six months ended June 30, 2019, primarily due to the sale of our Visa Class B shares, as described above, and growth across most of our business lines.lines with the full impact of the Beneficial acquisition during the six months ended June 30, 2020, offset by lower net unrealized gains of $4.2 million on our equity investments during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. See “Noninterest“Noninterest (Fee) Income” for further information.
•Noninterest expense increased $57.1decreased $23.5 million during the threesix months ended SeptemberJune 30, 20192020 compared to the threesix months ended SeptemberJune 30, 2018, primarily due2019, as net corporate development and restructuring costs related to $18.3our acquisition of Beneficial decreased by $42.7 million, partially offset by $9.3 million of higher employee-related costs $15.3to support organic and merger-related growth, $5.0 million increase in other operating costs (which includes occupancy, equipment, data processing and operations expenses)expenses, and the contribution to support organicWSFS Community Foundation) and merger-related growth, $15.1$4.2 million of net corporate development and restructuring costs related to our acquisition of Beneficial, and a $7.9 million increase due to an insurance recovery of legal settlement payments that occurred during the third quarter of 2018.higher professional fees. See “Noninterest“Noninterest Expense” for further information.
Nine months ended September 30, 2019:For the nine months ended September 30, 2019, net income was $103.1 million compared with $105.0 million for the nine months ended September 30, 2018, a decrease of $1.9 million. Net interest income increased $145.6 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to the acquisition of Beneficial, as well as improved positioning in the higher short-term interest rate environment over the last year, pricing discipline, and loan growth. See “Net Interest Income” for further information. Noninterest income for the nine months ended September 30, 2019 increased $22.0 million in comparison with the nine months ended September 30, 2018, reflecting growth across most of our business lines and an increase of $3.8 million in the amount of realized/unrealized gains on our investments in Visa Class B shares and Spring EQ for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. See “Noninterest (Fee) Income” for further information. Noninterest expense increased $151.3 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to $61.4 million of net corporate development and restructuring costs related to our acquisition of Beneficial, $42.2 million of employee-related costs, $34.3 million in other operating costs (which includes occupancy, equipment, data processing and operations expenses) to support organic and merger-related growth, and a $7.9 million increase due to an insurance recovery of legal settlement payments as described in the previous paragraph. See “Noninterest Expense” for further information.
Net Interest Income
The following table providestables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:
| | | | Three months ended September 30, | | | | Three months ended June 30, | |
| | | 2019 | | | 2018 | | | | 2020 | | | 2019 | |
(Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) | (Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) |
Assets: | Assets: | | | | | | | | | | | | | Assets: | | | | | | | | | | | | |
Interest-earning assets: | Interest-earning assets: | | Interest-earning assets: | |
Loans:(2) | Loans:(2) | | Loans:(2) | |
Commercial real estate loans | Commercial real estate loans | | $ | 2,783,199 | | | $ | 37,492 | | | 5.34 | % | | $ | 1,453,110 | | | $ | 19,833 | | | 5.41 | % | Commercial real estate loans | | $ | 2,841,231 | | | $ | 31,230 | | | 4.42 | % | | $ | 2,857,091 | | | $ | 45,458 | | | 6.38 | % |
Residential real estate loans | | 1,069,495 | | | 14,580 | | | 5.45 | | | 228,256 | | | 3,722 | | | 6.52 | | |
Commercial loans | | 3,548,597 | | | 55,903 | | | 6.26 | | | 2,594,124 | | | 34,463 | | | 5.29 | | |
Residential loans | | Residential loans | | 933,854 | | | 13,679 | | | 5.86 | | | 1,102,362 | | | 15,359 | | | 5.57 | |
Commercial loans and leases | | Commercial loans and leases | | 4,291,301 | | | 53,390 | | | 5.01 | | | 3,571,559 | | | 51,798 | | | 5.83 | |
Consumer loans | Consumer loans | | 1,135,575 | | | 16,286 | | | 5.69 | | | 638,849 | | | 8,753 | | | 5.44 | | Consumer loans | | 1,124,742 | | | 13,065 | | | 4.67 | | | 1,126,385 | | | 15,958 | | | 5.68 | |
Loans held for sale | Loans held for sale | | 50,465 | | | 539 | | | 4.24 | | | 27,503 | | | 393 | | | 5.67 | | Loans held for sale | | 92,252 | | | 896 | | | 3.91 | | | 37,728 | | | 428 | | | 4.55 | |
Total loans | | 8,587,331 | | | 124,800 | | | 5.77 | | | 4,941,842 | | | 67,164 | | | 5.40 | | |
Total loans and leases | | Total loans and leases | | 9,283,380 | | | 112,260 | | | 4.87 | | | 8,695,125 | | | 129,001 | | | 5.96 | |
Mortgage-backed securities(3) | Mortgage-backed securities(3) | | 1,833,267 | | | 12,989 | | | 2.83 | | | 970,501 | | | 6,662 | | | 2.75 | | Mortgage-backed securities(3) | | 2,048,357 | | | 12,549 | | | 2.45 | | | 1,653,582 | | | 12,229 | | | 2.96 | |
Investment securities(3) | Investment securities(3) | | 137,497 | | | 968 | | | 3.35 | | | 153,718 | | | 1,079 | | | 3.36 | | Investment securities(3) | | 130,671 | | | 1,009 | | | 3.82 | | | 146,064 | | | 1,030 | | | 3.39 | |
Other interest-earning assets | Other interest-earning assets | | 423,470 | | | 2,505 | | | 2.35 | | | 62,145 | | | 510 | | | 3.26 | | Other interest-earning assets | | 220,801 | | | 65 | | | 0.12 | | | 89,145 | | | 643 | | | 2.89 | |
Total interest-earning assets | Total interest-earning assets | | 10,981,565 | | | 141,262 | | | 5.11 | % | | 6,128,206 | | | 75,415 | | | 4.90 | % | Total interest-earning assets | | 11,683,209 | | | $ | 125,883 | | | 4.34 | % | | 10,583,916 | | | $ | 142,903 | | | 5.43 | % |
Allowance for loan losses | | (46,773) | | | | | (42,074) | | | | | |
Allowance for credit losses | | Allowance for credit losses | | (156,576) | | | | | (46,719) | | | | |
Cash and due from banks | Cash and due from banks | | 115,506 | | | 94,959 | | | Cash and due from banks | | 108,463 | | | 112,657 | | |
Cash in non-owned ATMs | Cash in non-owned ATMs | | 313,456 | | | 546,464 | | | Cash in non-owned ATMs | | 319,154 | | | 364,236 | | |
Bank-owned life insurance | Bank-owned life insurance | | 30,558 | | | 6,347 | | | Bank-owned life insurance | | 29,965 | | | 56,332 | | |
Other noninterest-earning assets | Other noninterest-earning assets | | 1,024,108 | | | 346,743 | | | Other noninterest-earning assets | | 1,036,500 | | | 1,052,544 | | |
Total assets | Total assets | | $ | 12,418,420 | | | $ | 7,080,645 | | | Total assets | | $ | 13,020,715 | | | $ | 12,122,966 | | |
Liabilities and Stockholders’ Equity: | Liabilities and Stockholders’ Equity: | | | | | | Liabilities and Stockholders’ Equity: | | | | | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | Interest-bearing liabilities: | |
Interest-bearing deposits: | Interest-bearing deposits: | | Interest-bearing deposits: | |
Interest-bearing demand | Interest-bearing demand | | $ | 2,055,497 | | | $ | 2,490 | | | 0.48 | % | | $ | 977,915 | | | $ | 1,126 | | | 0.46 | % | Interest-bearing demand | | $ | 2,213,369 | | | $ | 882 | | | 0.16 | % | | $ | 2,029,361 | | | $ | 2,163 | | | 0.43 | % |
Money market | Money market | | 1,966,545 | | | 5,034 | | | 1.02 | | | 1,498,437 | | | 2,667 | | | 0.71 | | Money market | | 2,262,737 | | | 2,311 | | | 0.41 | | | 1,936,112 | | | 4,932 | | | 1.02 | |
Savings | Savings | | 1,579,463 | | | 2,068 | | | 0.52 | | | 550,146 | | | 257 | | | 0.19 | | Savings | | 1,681,587 | | | 877 | | | 0.21 | | | 1,657,790 | | | 2,009 | | | 0.49 | |
Customer time deposits | Customer time deposits | | 1,371,744 | | | 5,452 | | | 1.58 | | | 701,897 | | | 2,393 | | | 1.35 | | Customer time deposits | | 1,242,730 | | | 4,954 | | | 1.60 | | | 1,476,763 | | | 5,100 | | | 1.39 | |
Total interest-bearing customer deposits | Total interest-bearing customer deposits | | 6,973,249 | | | 15,044 | | | 0.86 | | | 3,728,395 | | | 6,443 | | | 0.69 | | Total interest-bearing customer deposits | | 7,400,423 | | | 9,024 | | | 0.49 | | | 7,100,026 | | | 14,204 | | | 0.80 | |
Brokered certificates of deposit | Brokered certificates of deposit | | 294,485 | | | 1,807 | | | 2.43 | | | 319,456 | | | 1,534 | | | 1.91 | | Brokered certificates of deposit | | 286,655 | | | 808 | | | 1.13 | | | 307,514 | | | 1,919 | | | 2.50 | |
Total interest-bearing deposits | Total interest-bearing deposits | | 7,267,734 | | | 16,851 | | | 0.92 | | | 4,047,851 | | | 7,977 | | | 0.78 | | Total interest-bearing deposits | | 7,687,078 | | | 9,832 | | | 0.51 | | | 7,407,540 | | | 16,123 | | | 0.87 | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 187,721 | | | 1,099 | | | 2.32 | | | 381,386 | | | 2,097 | | | 2.18 | | Federal Home Loan Bank advances | | 106,694 | | | 625 | | | 2.36 | | | 134,151 | | | 806 | | | 2.41 | |
Trust preferred borrowings | Trust preferred borrowings | | 67,011 | | | 693 | | | 4.10 | | | 67,011 | | | 677 | | | 4.01 | | Trust preferred borrowings | | 67,011 | | | 484 | | | 2.90 | | | 67,011 | | | 717 | | | 4.29 | |
Senior debt | Senior debt | | 98,519 | | | 1,179 | | | 4.79 | | | 98,301 | | | 1,179 | | | 4.80 | | Senior debt | | 98,681 | | | 1,180 | | | 4.78 | | | 98,464 | | | 1,180 | | | 4.79 | |
Other borrowed funds(4) | Other borrowed funds(4) | | 127,850 | | | 607 | | | 1.88 | | | 114,427 | | | 388 | | | 1.35 | | Other borrowed funds(4) | | 25,580 | | | 6 | | | 0.09 | | | 161,903 | | | 845 | | | 2.09 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | | 7,748,835 | | | 20,429 | | | 1.05 | % | | 4,708,976 | | | 12,318 | | | 1.04 | % | Total interest-bearing liabilities | | 7,985,044 | | | $ | 12,127 | | | 0.61 | % | | 7,869,069 | | | $ | 19,671 | | | 1.00 | % |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | | 2,503,816 | | | | | 1,507,434 | | | | | Noninterest-bearing demand deposits | | 2,882,999 | | | | | 2,126,640 | | | | |
Other noninterest-bearing liabilities | Other noninterest-bearing liabilities | | 323,350 | | | 82,135 | | | Other noninterest-bearing liabilities | | 311,697 | | | 315,108 | | |
Stockholders’ equity | Stockholders’ equity | | 1,842,759 | | | 782,100 | | | Stockholders’ equity | | 1,842,525 | | | 1,812,302 | | |
Noncontrolling interest | Noncontrolling interest | | (340) | | | — | | | Noncontrolling interest | | (1,550) | | | (153) | | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 12,418,420 | | | $ | 7,080,645 | | | Total liabilities and stockholders’ equity | | $ | 13,020,715 | | | $ | 12,122,966 | | |
Excess of interest-earning assets over interest-bearing liabilities | Excess of interest-earning assets over interest-bearing liabilities | | $ | 3,232,730 | | | $ | 1,419,230 | | | Excess of interest-earning assets over interest-bearing liabilities | | $ | 3,698,165 | | | $ | 2,714,847 | | |
Net interest and dividend income | Net interest and dividend income | | | | $ | 120,833 | | | | | $ | 63,097 | | | Net interest and dividend income | | | | $ | 113,756 | | | | | $ | 123,232 | | |
Interest rate spread | Interest rate spread | | | | 4.06 | % | | | | 3.86 | % | Interest rate spread | | | | 3.73 | % | | | | 4.43 | % |
Net interest margin | Net interest margin | | 4.38 | % | | 4.11 | % | Net interest margin | | 3.93 | % | | 4.68 | % |
|
(1)Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2)Average balances are net of unearned income and include nonperforming loans.
(3)Includes securities available for saleavailable-for-sale at fair value.
(4)Includes federal funds purchased.
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| | Nine months ended September 30, | | | | | | | | | | |
| | 2019 | | | | | | 2018 | | | | |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans:(2) | | | | | | | | | | | | |
Commercial real estate loans | | $ | 2,539,752 | | | $ | 111,470 | | | 5.87 | % | | $ | 1,443,657 | | | $ | 57,392 | | | 5.32 | % |
Residential real estate loans | | 902,162 | | | 37,538 | | | 5.55 | | | 238,356 | | | 11,070 | | | 6.19 | |
Commercial loans | | 3,327,414 | | | 146,935 | | | 5.92 | | | 2,577,153 | | | 99,047 | | | 5.15 | |
Consumer loans | | 1,035,907 | | | 43,711 | | | 5.64 | | | 604,411 | | | 23,681 | | | 5.24 | |
Loans held for sale | | 36,335 | | | 1,264 | | | 4.65 | | | 22,556 | | | 881 | | | 5.22 | |
Total loans | | 7,841,570 | | | 340,918 | | | 5.82 | | | 4,886,133 | | | 192,071 | | | 5.26 | |
Mortgage-backed securities(3) | | 1,642,787 | | | 35,684 | | | 2.90 | | | 916,068 | | | 18,251 | | | 2.66 | |
Investment securities(3) | | 144,187 | | | 3,042 | | | 3.38 | | | 157,484 | | | 3,307 | | | 3.41 | |
Other interest-earning assets | | 198,471 | | | 4,098 | | | 2.76 | | | 40,828 | | | 1,550 | | | 5.08 | |
Total interest-earning assets | | 9,827,015 | | | 383,742 | | | 5.23 | % | | 6,000,513 | | | 215,179 | | | 4.82 | % |
Allowance for loan losses | | (44,665) | | | | | | | (41,742) | | | | | |
Cash and due from banks | | 111,979 | | | | | | | 113,992 | | | | | |
Cash in non-owned ATMs | | 368,160 | | | | | | | 533,307 | | | | | |
Bank-owned life insurance | | 40,633 | | | | | | | 32,747 | | | | | |
Other noninterest-earning assets | | 922,557 | | | | | | | 346,026 | | | | | |
Total assets | | $ | 11,225,679 | | | | | | | $ | 6,984,843 | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
Interest-bearing demand | | $ | 1,825,112 | | | $ | 6,389 | | | 0.47 | % | | $ | 982,295 | | | $ | 2,863 | | | 0.39 | % |
Money market | | 1,851,067 | | | 13,806 | | | 1.00 | | | 1,425,725 | | | 6,079 | | | 0.57 | |
Savings | | 1,397,124 | | | 4,949 | | | 0.47 | | | 556,779 | | | 771 | | | 0.19 | |
Customer time deposits | | 1,275,118 | | | 13,815 | | | 1.45 | | | 660,882 | | | 6,068 | | | 1.23 | |
Total interest-bearing customer deposits | | 6,348,421 | | | 38,959 | | | 0.82 | | | 3,625,681 | �� | | 15,781 | | | 0.58 | |
Brokered certificates of deposit | | 272,187 | | | 4,957 | | | 2.43 | | | 297,339 | | | 3,804 | | | 1.71 | |
Total interest-bearing deposits | | 6,620,608 | | | 43,916 | | | 0.89 | | | 3,923,020 | | | 19,585 | | | 0.67 | |
Federal Home Loan Bank advances | | 241,152 | | | 4,495 | | | 2.49 | | | 498,809 | | | 7,096 | | | 1.90 | |
Trust preferred borrowings | | 67,011 | | | 2,136 | | | 4.26 | | | 67,011 | | | 1,871 | | | 3.73 | |
Senior debt | | 98,465 | | | 3,538 | | | 4.79 | | | 98,247 | | | 3,538 | | | 4.80 | |
Other borrowed funds(4) | | 154,169 | | | 2,278 | | | 1.98 | | | 132,362 | | | 1,289 | | | 1.30 | |
Total interest-bearing liabilities | | 7,181,405 | | | 56,363 | | | 1.05 | % | | 4,719,449 | | | 33,379 | | | 0.95 | % |
Noninterest-bearing demand deposits | | 2,135,702 | | | | | | | 1,426,830 | | | | | |
Other noninterest-bearing liabilities | | 300,378 | | | | | | | 83,281 | | | | | |
Stockholders’ equity | | 1,608,375 | | | | | | | 755,283 | | | | | |
Noncontrolling interest | | (181) | | | | | | | — | | | | | |
Total liabilities and stockholders’ equity | | $ | 11,225,679 | | | | | | | $ | 6,984,843 | | | | | |
Excess of interest-earning assets over interest-bearing liabilities | | $ | 2,645,610 | | | | | | | $ | 1,281,064 | | | | | |
Net interest and dividend income | | | | $ | 327,379 | | | | | | | $ | 181,800 | | | |
Interest rate spread | | | | | | 4.18 | % | | | | | | 3.87 | % |
Net interest margin | | | | | | 4.47 | % | | | | | | 4.07 | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | | | | | | | | | |
| | 2020 | | | | | | 2019 | | | | |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/ Rate(1) | | Average Balance | | Interest | | Yield/ Rate(1) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans:(2) | | | | | | | | | | | | |
Commercial real estate loans | | $ | 2,825,049 | | | $ | 65,522 | | | 4.66 | % | | $ | 2,416,011 | | | $ | 73,978 | | | 6.17 | % |
Residential loans | | 963,131 | | | 27,219 | | | 5.65 | | | 817,109 | | | 22,958 | | | 5.62 | |
Commercial loans and leases | | 3,912,464 | | | 109,084 | | | 5.62 | | | 3,214,989 | | | 91,032 | | | 5.72 | |
Consumer loans | | 1,127,483 | | | 28,000 | | | 4.99 | | | 985,248 | | | 27,425 | | | 5.61 | |
Loans held for sale | | 81,068 | | | 1,637 | | | 4.06 | | | 29,153 | | | 725 | | | 5.01 | |
Total loans and leases | | 8,909,195 | | | 231,462 | | | 5.23 | | | 7,462,510 | | | 216,118 | | | 5.85 | |
Mortgage-backed securities(3) | | 2,003,997 | | | 25,768 | | | 2.57 | | | 1,545,968 | | | 22,695 | | | 2.94 | |
Investment securities(3) | | 130,896 | | | 1,935 | | | 3.61 | | | 147,587 | | | 2,074 | | | 3.40 | |
Other interest-earning assets | | 148,578 | | | 573 | | | 0.78 | | | 84,108 | | | 1,593 | | | 3.82 | |
Total interest-earning assets | | 11,192,666 | | | $ | 259,738 | | | 4.68 | % | | 9,240,173 | | | $ | 242,480 | | | 5.31 | % |
Allowance for credit losses | | (120,816) | | | | | | | (43,593) | | | | | |
Cash and due from banks | | 124,129 | | | | | | | 110,231 | | | | | |
Cash in non-owned ATMs | | 327,314 | | | | | | | 395,920 | | | | | |
Bank-owned life insurance | | 30,059 | | | | | | | 45,754 | | | | | |
Other noninterest-earning assets | | 1,036,767 | | | | | | | 870,940 | | | | | |
Total assets | | $ | 12,590,119 | | | | | | | $ | 10,619,425 | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
Interest-bearing demand | | $ | 2,149,299 | | | $ | 2,779 | | | 0.26 | % | | $ | 1,708,010 | | | $ | 3,899 | | | 0.46 | % |
Money market | | 2,207,861 | | | 6,400 | | | 0.58 | | | 1,792,371 | | | 8,771 | | | 0.99 | |
Savings | | 1,627,901 | | | 2,621 | | | 0.32 | | | 1,304,443 | | | 2,881 | | | 0.45 | |
Customer time deposits | | 1,274,081 | | | 10,610 | | | 1.67 | | | 1,226,003 | | | 8,364 | | | 1.38 | |
Total interest-bearing customer deposits | | 7,259,142 | | | 22,410 | | | 0.62 | | | 6,030,827 | | | 23,915 | | | 0.80 | |
Brokered certificates of deposit | | 258,539 | | | 2,059 | | | 1.60 | | | 260,854 | | | 3,150 | | | 2.44 | |
Total interest-bearing deposits | | 7,517,681 | | | 24,469 | | | 0.65 | | | 6,291,681 | | | 27,065 | | | 0.87 | |
Federal Home Loan Bank advances | | 138,376 | | | 1,455 | | | 2.11 | | | 268,311 | | | 3,396 | | | 2.55 | |
Trust preferred borrowings | | 67,011 | | | 1,070 | | | 3.21 | | | 67,011 | | | 1,443 | | | 4.34 | |
Senior debt | | 98,654 | | | 2,359 | | | 4.78 | | | 98,437 | | | 2,359 | | | 4.79 | |
Other borrowed funds(4) | | 86,918 | | | 479 | | | 1.11 | | | 167,547 | | | 1,671 | | | 2.01 | |
Total interest-bearing liabilities | | 7,908,640 | | | $ | 29,832 | | | 0.76 | % | | 6,892,987 | | | $ | 35,934 | | | 1.05 | % |
Noninterest-bearing demand deposits | | 2,524,755 | | | | | | | 1,948,594 | | | | | |
Other noninterest-bearing liabilities | | 318,941 | | | | | | | 288,703 | | | | | |
Stockholders’ equity | | 1,839,013 | | | | | | | 1,489,241 | | | | | |
Noncontrolling interest | | (1,230) | | | | | | | (100) | | | | | |
Total liabilities and stockholders’ equity | | $ | 12,590,119 | | | | | | | $ | 10,619,425 | | | | | |
Excess of interest-earning assets over interest-bearing liabilities | | $ | 3,284,026 | | | | | | | $ | 2,347,186 | | | | | |
Net interest and dividend income | | | | $ | 229,906 | | | | | | | $ | 206,546 | | | |
Interest rate spread | | | | | | 3.92 | % | | | | | | 4.26 | % |
Net interest margin | | | | | | 4.14 | % | | | | | | 4.52 | % |
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(1)Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2)Average balances are net of unearned income and include nonperforming loans.
(3)Includes securities available for saleavailable-for-sale at fair value.
(4)Includes federal funds purchased.
Three months ended SeptemberJune 30, 20192020: :During the three months ended SeptemberJune 30, 2019,2020, net interest income increased $57.7decreased $9.5 million from the three months ended SeptemberJune 30, 2018.2019 primarily due to the lower rate environment and a $3.7 million decrease in purchase accounting accretion, partially offset by $4.8 million of net interest income from PPP loans which included $3.1 million of fee accretion. Net interest margin was 4.38%3.93% for the thirdsecond quarter of 2020, a 75 basis points decrease compared to 4.68% for the second quarter of 2019 due to the lower interest rate environment, lower purchase accounting accretion, impact of PPP loans and asset mix from the significant short-term liquidity increase in customer deposits.
Six months ended June 30, 2020: During the six months ended June 30, 2020, net interest income increased $23.4 million from the six months ended June 30, 2019 due to a 27full six month impact of the Beneficial acquisition in the current year and the impact of net interest income from PPP loans described above. Net interest margin was 4.14% for the six months ended June 30, 2020, a 38 basis points increasedecrease compared to 4.11%4.52% for the third quarter of 2018. This increase includes approximately 40 basis points ofsix months ended June 30, 2019 due to higher purchase accounting accretion partially offset by approximately 7 basis points ofthe current significantly lower interest rate environment and expected margin compression due to Beneficial's lower-margin balance sheet and approximately 6 basis points from a $2.0 billion short-term institutional trust deposit, which was withdrawn as expected during the quarter.
Nine months ended September 30, 2019:During the nine months ended September 30, 2019, net interest income increased $145.6 million from the nine months ended September 30, 2018. Net interest margin was 4.47% for the nine months ended September 30, 2019, a 40 basis points increase compared to 4.07% for the nine months ended September 30, 2018. This increase includes approximately 36 basis points of higher purchase accounting accretion and 5 basis points due to improved positioning in the higher short-term interest rate environment over the last year and our balance sheet optimization, partially offset by approximately 1 basis point from the $2.0 billion short-term institutional trust deposit noted above.sheet.
Provision/Allowance for LoanCredit Losses
During the six months ended June 30, 2020, we adopted the CECL method of accounting for loans and leases, and our held-to-maturity debt securities portfolio, which considers forward-looking information when establishing reserves for credit losses. We maintain anthe allowance for loancredit losses at an appropriate level based on our assessment of estimable and probableexpected losses in the loan portfolio. Our allowance for loancredit losses is based on our historical loss experience that includes the inherent risk of our loans and various other factors including but not limited to, collateral values, trends in asset quality, level of delinquent loans and concentrations. In addition,Further, regional and national economic conditionsforecasts are taken into consideration.considered in our expected credit losses. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments.
The provision for loancredit losses was $4.1$94.8 million for the three months ended SeptemberJune 30, 2019 compared to $3.72020, an increase of $82.6 million forfrom the three months ended SeptemberJune 30, 2018.2019. For the ninesix months ended SeptemberJune 30, 2019,2020, the provision for loancredit losses increased $14.1was $151.4 million, to $24.0an increase of $131.6 million from the same periods in 2018,six months ended June 30, 2019. These increases were primarily due to two legacy WSFS C&I loans, previously classified as nonperforming, that experienced significant credit eventsacute deterioration in the secondeconomic forecast used in our CECL models related to the COVID-19 pandemic, and loan migration that occurred during the quarter of 2019 resulting in higher levels of provision for loan lossesseveral specific portfolios, mainly in the accommodation and charge-offs.food service industries.
The allowance for loancredit losses was $47.7increased to $232.2 million at SeptemberJune 30, 2019 and $39.52020 from $47.6 million at December 31, 2018.2019. Of this increase, $35.9 million was due to our adoption of CECL as of January 1, 2020 and $151.4 million was due to the additional provision for credit losses during the six months ended June 30, 2020. The ratio of allowance for loancredit losses to total gross loans and leases was 0.56%2.45% at SeptemberJune 30, 20192020 and 0.81%0.56% at December 31, 2018. Excluding the impact of all purchased loans, this ratio would have been 1.00% and 0.89% at September 30, 2019 and December 31, 2018, respectively.2019. The ratio of net charge-offs to average gross loans net of unearned income, which excludes loans held for sale and reverse mortgages, was 0.27%0.06% (annualized) and 0.29%0.22% at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The ALLLallowance for credit losses was 124%887% of nonaccruing loans at SeptemberJune 30, 2019,2020, compared to 114%121% at SeptemberJune 30, 2018.2019. See Note 87 to the unaudited Consolidated Financial Statements for further information.
Noninterest (Fee) Income
Three months ended SeptemberJune 30, 20192020: :During the three months ended SeptemberJune 30, 2019,2020, noninterest (fee) income was $62.3$64.4 million, an increase of $20.4$21.5 million compared to $41.9from $42.9 million during the three months ended SeptemberJune 30, 2018,2019, and includes an increase of $14.3$21.0 million in the amount of realized/net realized and unrealized gaingains on equity investments.investments, as described above. Excluding this increase, noninterest income increased $6.1$0.5 million primarily due to increasesan increase of $1.9 million from credit/debit card and ATM income, primarily from higher interchange income and the impact of the Beneficial acquisition, $1.6$5.6 million in mortgage banking activities, and $1.5partially offset by a $4.4 million decrease in deposit service charges, primarilyCash Connect® due to our acquisitionthe impact of Beneficial.a lower interest rate environment, and a $1.2 million decrease in traditional banking-related fee income as a result of lower fees due to the higher average customer balances.
NineSix months ended SeptemberJune 30, 20192020: :ForDuring the ninesix months ended SeptemberJune 30, 2019,2020, noninterest (fee) income was $146.3$105.2 million, an increase of $22.0$21.2 million from $124.4$84.0 million forduring the ninesix months ended SeptemberJune 30, 2018,2019, and includes an increase of $3.8$17.9 million in realized/the amount of net realized and unrealized gainsgain on our equity investments.investments, as described above. Excluding this increase, noninterest income increased $18.2$3.4 million for the nine months ended September 30, 2019, primarily due to increasesan increase of $6.6 million in credit/debit card and ATM income, reflecting growth due to expanded revenue sources in our Cash Connect® business, higher interchange income, and the impact of the Beneficial acquisition, $3.2$7.0 million in mortgage banking activities, $3.0a $2.5 million increase in securities gains, net, and a $1.4 million increase in fiduciary and investment management income. These increases were partially offset by a $4.5 million decrease in Cash Connect®, as described above, a $2.5 million decrease in other income, and a $1.0 million decrease in deposit service charges which reflects the impact of our acquisition of Beneficial, and $2.8 million in other non-interest income, primarily due to continued growthlower transaction volume in the bailment, cash management and smart safe in our Cash Connect® business, and income related tocurrent period as a non-recurring transfer of client accounts to a departing Wealth investment adviser, in accordance with the buy-out provisionsresult of the adviser's contract received during the first quarter of 2019.COVID-19 pandemic.
For further information, see Note 43 to the unaudited Consolidated Financial Statements.
Noninterest Expense
Three months ended SeptemberJune 30, 20192020: :Noninterest expense for the three months ended SeptemberJune 30, 20192020 was $109.6$93.4 million, an increasea decrease of $57.1$14.4 million from $52.5$107.8 million for the three months ended SeptemberJune 30, 2018.2019. Excluding a decrease of $13.0 million in net corporate development and restructuring costs related to our acquisition of Beneficial, noninterest expense decreased $1.4 million from the three months ended June 30, 2019. This increasedecrease includes $15.1$4.8 million of lower operating costs and occupancy costs, including spend on travel and entertainment due to COVID-19, offset by an increases of $3.2 million in unfunded commitment reserve expense and the COVID-19 and PPP related costs described above.
Six months ended June 30, 2020: Noninterest expense for the six months ended June 30, 2020 was $181.9 million, a decrease of $23.5 million from $205.4 million for the six months ended June 30, 2019. Excluding a decrease of $42.7 million in net corporate development and restructuring costs related to our acquisition of Beneficial, and a $7.9$3.0 million insurance recovery of legal settlement payments that occurredcontribution to the WSFS Community Foundation during the thirdfirst quarter of 2018. Excluding these costs,2020, noninterest expense for the three months ended September 30, 2019 increased $34.1$16.2 million compared to the threesix months ended SeptemberJune 30, 2018, which2019. This increase was primarily due to increases of $18.3a $9.3 million increase in salaries, benefits, and other compensation, and $15.3a $4.2 million of higher operating costsincrease in professional fees, and occupancy costs, all supporting growth in our balance sheet and fee-based businesses and also reflects the impact of the Beneficial acquisition.
Nine months ended September 30, 2019:Noninterest expense for the nine months ended September 30, 2019 was $315.0 million, an increase of $151.3 million from $163.7 million during the nine months ended September 30, 2018. This increase includes $61.4 million of net corporate development and restructuring costs related to our acquisition of Beneficial, and the $7.9 million insurance recovery as noted above. Excluding these costs, noninterest expense for the nine months ended September 30, 2019 increased $81.9 million, compared with the nine months ended September 30, 2018, which was primarily due to increases of $42.2$3.4 million in salaries, benefits and other compensation costs, and $34.3 million of higher operating costs and occupancy costs, both due to the costs to support overall franchise growth and the impact of the Beneficial acquisition.unfunded commitment reserve expense
Income Taxes
We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, Income Taxes, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded income tax expensebenefit of $15.9$2.2 million and $32.3$1.0 million during the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to income tax expense of $9.9$10.1 million and $27.6$16.4 million for the same periods in 2018.2019.
Our effective tax rate was 22.9%22.3% and 23.9%(53.4)% for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to 20.3%21.9% and 20.8% during25.1% for the same periods in 2018.2019. The effective tax rate for the ninesix months ended SeptemberJune 30, 2019 increased2020 decreased primarily due to non-deductiblenondeductible expenses associated with the acquisition of Beneficial.Beneficial incurred during the first quarter of 2019. Nondeductible acquisition costs of $8.2 million were recognized during the nine months ended September 30,first quarter of 2019, whereas none were incurred in the comparable period in 2018. Further,2020. In addition, we recognized $1.8 million in tax benefits during the six months ended June 30, 2020 related to tax law changes contained in the CARES Act (see "Recent Regulatory Developments"), 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. Finally, the tax benefit related to stock-based compensation activity during the ninesix months ended SeptemberJune 30, 20192020 pursuant to ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation - Stock Compensation (Topic 718), decreased compared to the prior year. The tax benefit recognized duringDuring the three and ninesix months ended SeptemberJune 30, 2019 were $0.72020, a $0.2 million tax expense and $1.9a less than $0.1 million tax benefit was recognized, respectively, compared to a tax benefit of $1.2 million and $3.3$1.3 million for the comparable periodsame periods in 2018.2019.
The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, 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.
Contractual Obligations
Our contractual obligations at SeptemberJune 30, 20192020 did not significantly change from our contractual obligations at MarchDecember 31, 2019, which are disclosed in our QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended MarchDecember 31, 2019.
RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE
The following table provides a reconciliation of tangible common book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.
| (Dollars and share amounts in thousands, except per share amounts) | (Dollars and share amounts in thousands, except per share amounts) | | September 30, 2019 | | December 31, 2018 | (Dollars and share amounts in thousands, except per share amounts) | | June 30, 2020 | | December 31, 2019 |
Stockholders’ equity | Stockholders’ equity | | $ | 1,856,992 | | | $ | 820,920 | | Stockholders’ equity | | $ | 1,823,669 | | | $ | 1,850,306 | |
Less: Goodwill and other intangible assets | Less: Goodwill and other intangible assets | | 571,850 | | | 186,023 | | Less: Goodwill and other intangible assets | | 562,515 | | | 568,745 | |
Tangible common equity (numerator) | Tangible common equity (numerator) | | $ | 1,285,142 | | | $ | 634,897 | | Tangible common equity (numerator) | | $ | 1,261,154 | | | $ | 1,281,561 | |
Shares of common stock outstanding (denominator) | Shares of common stock outstanding (denominator) | | 52,445 | | | 31,374 | | Shares of common stock outstanding (denominator) | | 50,660 | | | 51,567 | |
Book value per share of common stock | Book value per share of common stock | | $ | 35.41 | | | $ | 26.17 | | Book value per share of common stock | | $ | 36.00 | | | $ | 35.88 | |
Goodwill and other intangible assets | Goodwill and other intangible assets | | 10.91 | | | 5.93 | | Goodwill and other intangible assets | | 11.11 | | | 11.03 | |
Tangible book value per share of common stock | Tangible book value per share of common stock | | $ | 24.50 | | | $ | 20.24 | | Tangible book value per share of common stock | | $ | 24.89 | | | $ | 24.85 | |
CRITICAL ACCOUNTING ESTIMATES
The preparation of the unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those used to determine the allowance for loancredit losses, deferred taxes, fair value measurements, 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 assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2019,2020, it is possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.
For further discussion ofCritical accounting estimates at June 30, 2020 did not significantly change from our critical accounting estimates seeat March 31, 2020 and December 31, 2019, which are disclosed in our Quarterly Report on Form 10-Q for the “Management's Discussionperiod ended March 31, 2020, and Analysis - Critical Accounting Estimates” section of our Annual Report on Form 10-K for the year ended December 31, 2018.2019, respectively.
RECENT REGULATORY DEVELOPMENTS
Recent regulatory developments at SeptemberJune 30, 20192020 did not significantly change from our recent regulatory developments at June 30,December 31, 2019, which are disclosed in our QuarterlyAnnual Report on Form 10-Q10-K for the year ended December 31, 2019, except as noted below.
Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 27, 2020, the CARES Act was enacted, providing wide ranging economic relief for individuals and businesses impacted by COVID-19. Among other things, the statute created the Paycheck Protection Program (PPP) and funded it with $349 billion. The PPP is a stimulus response to the potential economic impacts of COVID-19, and its purpose is to provide forgivable loans to smaller businesses that use the proceeds of the loans for payroll and certain other qualifying expenses. The Small Business Administration (SBA) manages and backs the PPP. If a loan is fully forgiven, SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by SBA.
On April 6, 2020, WSFS Bank began participating in the PPP, We processed PPP loan applications until April 16, 2020, when the SBA announced that it had exhausted the $349 billion appropriated in the CARES Act, and stopped accepting PPP applications. On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, which supplemented certain programs established by the CARES Act and provided $310 billion in additional funding for the PPP. During the second quarter endedof 2020, we provided nearly $1.0 billion in PPP loans for more than 5,400 new and existing WSFS Customers. The statute did not change the PPP loan application deadline of June 30, 2019.2020, set by the CARES Act.
We are also providing a number of customer relief programs in our commercial and retail portfolios, such as payment deferrals or interest only payments on loans and leases, disaster assistance, and waiving minimum deposit balance and direct deposit requirements as well as early withdrawal penalties for CDs or IRAs. Additionally, we are offering new lines of credit or increases to existing lines of credit and increased remote deposit limits for those individuals and businesses impacted by COVID-19. During the second quarter of 2020, we have modified approximately $2.1 billion of loans and leases to provide our customers this monetary relief.
The CARES Act also provides us with an opportunity to carry back net operating losses (NOLs) arising from 2018, 2019 and 2020 to the prior five tax years. We have such NOLs reflected on our balance sheet as a portion of our current tax receivables, which were previously valued at the federal corporate income tax rate of 21%. However, the provisions of the CARES Act provide for NOL carryback claims to be calculated based on a rate of 35%, which was the federal corporate tax rate in effect for the carryback years. Consequently, effective June 30, 2020, we have revalued the benefit from its NOLs to reflect a 35% tax rate.
Transition from London Inter-Bank Offered Rate (LIBOR)
In 2014, a committee of private-market derivative participants and their regulators, the Alternative Reference Rate Committee (ARRC), was convened by the Federal Reserve to identify an alternative reference interest rate to replace LIBOR. In June 2017, the ARRC announced the Secured Overnight Funding Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR. In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. In April 2018, the Federal Reserve Bank of New York began to publish SOFR rates on a daily basis, and the ARRC and other institutions continue to take steps to advance SOFR as an alternative benchmark.
Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are indexed to LIBOR. As of June 30, 2020, the Company had approximately $1.7 billion of loans and $901.2 million of derivatives that are utilized for customer guarantees, indexed to LIBOR, that mature after 2021. In addition, the Company had approximately $167.0 million of debt securities outstanding that are indexed to LIBOR (either currently or in the future) as of June 30, 2020. The Company has one investment security totaling $0.5 million, and no repurchase and resale agreements or FHLB advances indexed to LIBOR as of June 30, 2020.
Due to the uncertainty surrounding the future of LIBOR, it is expected that the transition will span several reporting periods through, and potentially beyond, the end of 2021. A cross-functional team from Finance, Lending, Risk and IT is leading our efforts to monitor this activity and evaluate the related risks and potential process changes arising from the transition from LIBOR. We have completed our initial assessment efforts, including our internal risk assessment procedures, and the cross-functional team is working towards the migration of our existing contracts and system implementation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
IncorporatedThe information required by this Item is incorporated herein by reference fromto the information provided in Item 2 Part I (Interest Rate Sensitivity) of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b)Changes in internal control over financial reporting. During the three months ended SeptemberJune 30, 2019,2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
IncorporatedThe information required by this Item is incorporated herein by reference to the information provided in Note 2019 – Legal and Other Proceedings to the unaudited Consolidated Financial Statements.
Item 1A. Risk Factors
There have not been any material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, previously filed with the Securities and Exchange Commission.Commission, except noted as below.
The novel coronavirus (“COVID-19”) pandemic and the impact of actions to mitigate the spread of the virus could adversely affect our business, financial condition and results of operations.
Federal, state and local governments have enacted various restrictions in an attempt to limit the spread of COVID-19. Such measures have disrupted economic activity and contributed to job losses and reductions in consumer and business spending. In response to the economic and financial effects of COVID-19, the Federal Reserve Board has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs. In addition, the Trump Administration, Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.
The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. Beginning April 6, 2020, we began processing loan applications under the Paycheck Protection Program (PPP) created under the CARES Act. All of the federal banking regulatory agencies have encouraged lenders to extend additional loans, and the federal government is considering additional stimulus and support legislation focused on providing aid to various sectors, including small businesses. We are also making a high level of loan modifications under our deferred payment program. The full impact on our lending and other business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators’ reaction to such activities, remains uncertain.
The continuation of the economic effects of the COVID-19 pandemic have had a destabilizing effect on financial markets, key market indices and overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption has caused increased market volatility and has led to an economic recession and a significant decrease in consumer confidence and business generally. The continuation of these conditions (including whether due to a resurgence or a second wave of COVID-19 infections, particularly as the geographic areas in which we operate begin to re-open), as well as the impacts of the CARES Act and other federal and state measures, specifically with respect to loan forbearances, has adversely affected our results of operations and financial condition, and have and can be expected to further adversely impact our businesses and results of operations and the operations of our borrowers, customers and business partners. In particular, these events have had, and/or can be expected to continue to have, the following effects, among other things:
•impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies and modifications to loans;
•impair the value of collateral securing loans (particularly with respect to real estate);
•impair the value of our assets, including our securities portfolio, goodwill and intangible assets;
•require an increase in our allowance for credit losses, particularly in light of our adoption of CECL in the first quarter of 2020;
•adversely affect the stability of our deposit base or otherwise impair our liquidity;
•reduce our revenues from fee-based services, including wealth management and the demand for our products and services;
•negatively impact our self-insurance healthcare costs;
•create stress on our operations and systems associated with our participation in the PPP as a result of high demand and volume of applications;
•result in increased compliance risk as we become subject to new regulatory and other requirements, including new and changing guidance, associated with the PPP and other new programs in which we participate;
•impair the ability of loan guarantors to honor commitments;
•negatively impact our regulatory capital ratios;
•negatively impact the productivity and availability of key personnel and other Associates necessary to conduct our business, and of third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and
•increase cyber and payment fraud risk and other operational risks, given increased online and remote activity, which may adversely affect the realization of the anticipated benefits of our Delivery Transformation initiative.
Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices could further harm our business and those of our customers, in particular our small to medium sized business customers. Although we have business continuity plans and other safeguards in place, there is no assurance that they will be effective.
Our loan portfolio includes loans that are in forbearance but which are not classified as TDRs because they were current at the time forbearance began. When the forbearance periods end, we may be required to classify a substantial portion of these loans as problem loans.
Our results of operations have been adversely affected by the factors described above. For example, in the quarter ended June 30, 2020 these factors caused a substantial increase in our provision for credit losses and the amount of our problem loans. While the ultimate impact of these factors over the longer term is uncertain and we do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole, nor the pace of economic recovery when the COVID-19 pandemic subsides, the decline in economic conditions generally and a prolonged negative impact on small to medium sized businesses, in particular, due to COVID-19 is likely to result in an adverse effect on our business, financial condition and results of operations in future periods, and may heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2019.
During the fourth quarter of 2018, the Board of Directors of the Company approved a stock buybackrepurchase program that enables us to repurchase up to 3,136,978 shares of common stock after the closing of our acquisition of Beneficial, which occurred on March 1, 2019. Under the program, purchasesrepurchases may be made from time to time in the open market or through negotiated transactions, subject to market conditions and other factors, and in accordance with applicable securities laws. The program is consistent with our intent to return a minimum of 25% of annual net income to stockholders through dividends and share repurchases while maintaining capital ratios in excess of “well-capitalized” regulatory benchmarks.
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2019 | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
July | | 144,300 | | | $ | 41.80 | | | 144,300 | | | 2,721,338 | |
August | | 475,000 | | | 41.50 | | | 475,000 | | | 2,246,338 | |
September | | 340,000 | | | 43.72 | | | 340,000 | | | 1,906,338 | |
Total | | 959,300 | | | 42.33 | | | 959,300 | | | |
During the first quarter of 2020, the Board of Directors approved a new share repurchase program authorizing the repurchase of 7,594,977 shares, or 15% of outstanding shares as of March 31, 2020; however, we have temporarily suspended all share repurchases until we have a clearer long-term view on the impact of COVID-19 on the economy and our performance. During the three months ended June 30, 2020, no repurchases of shares of common stock were made under the Company's new share repurchase program.
(1)
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit Number | | Description of Document |
2.1 | | Agreement and Plan of Reorganization, dated as of August 7, 2018, as amended on November 1, 2018, by and between WSFS Financial Corporation and Beneficial Bancorp, Inc. is incorporated herein by reference to Exhibit 2.01 of the Registrant’s Form S-4/A filed on November 2, 2018. * |
3.1 | | Registrant’s Amended and Restated Certificate of Incorporation, as amended is incorporated herein by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K filed for the year ended December 31, 2011.2019. |
3.2 | | Certificate of Amendment, dated May 1, 2015, to the Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on May 5, 2015. |
3.3 | | Certificate of Amendment, dated April 30, 2019, to the Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on April 30, 2019. |
3.4 | | Amended and Restated Bylaws of WSFS Financial Corporation is incorporated herein by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on November 21, 2014. |
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31.1 | | |
31.2 | | |
32 | | |
101.INS | | XBRL Instance Document ** |
101.SCH | | XBRL Schema Document ** |
101.CAL | | XBRL Calculation Linkbase Document ** |
101.LAB | | XBRL Labels Linkbase Document ** |
101.PRE | | XBRL Presentation Linkbase Document ** |
101.DEF | | XBRL Definition Linkbase Document ** |
104 | | The cover page of this Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, filed with the SEC on November 8, 2019,August 7, 2020, is formatted in Inline XBRL. |
* Schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
** Submitted as Exhibits 101 to this Quarterly Report on Form 10-Q are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | WSFS FINANCIAL CORPORATION |
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Date: November 8, 2019August 7, 2020 | | /s/ Rodger Levenson |
| | Rodger Levenson |
| | Chairman, President and Chief Executive Officer |
| | (Principal Executive Officer) |
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Date: November 8, 2019August 7, 2020 | | /s/ Dominic C. Canuso |
| | Dominic C. Canuso |
| | Executive Vice President and |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |