WSFS Financial (WSFS) - 2020 Q3 - Quarterly Report

Filing Information This section details the company's Form 10-Q filing, filer status, and outstanding common stock - WSFS FINANCIAL CORPORATION filed its Quarterly Report on Form 10-Q for the period ended September 30, 2020[1][2] - The registrant is a large accelerated filer and is not a shell company[4] - As of October 31, 2020, there were 50.4 million shares of common stock outstanding[4] Securities Registered | 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 | Forward-Looking Statements This section outlines the inherent risks and uncertainties associated with forward-looking statements, disclaiming any duty to update them - The report contains forward-looking statements based on various assumptions and subject to risks and uncertainties, including difficult market conditions, loan losses due to COVID-19, changes in interest rates, regulatory compliance, and integration of acquisitions[7][8][11] - The Company disclaims any duty to revise or update any forward-looking statement, except as required by law[10] PART I. Financial Information This part presents the company's unaudited consolidated financial statements and related notes, along with management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for WSFS Financial Corporation, including statements of income, comprehensive income, financial condition, changes in stockholders' equity, and cash flows for the periods ended September 30, 2020 and 2019, and as of December 31, 2019 Consolidated Statements of Income This section provides the unaudited consolidated statements of income for the three and nine months ended September 30, 2020 and 2019 Consolidated Statements of Income (Three Months Ended September 30) (Dollars in thousands) | (Dollars in thousands) | 2020 | 2019 | | :--------------------- | :--- | :--- | | Interest income | $123,370 | $141,262 | | Interest expense | $10,322 | $20,429 | | Net interest income | $113,048 | $120,833 | | Provision for credit losses | $2,716 | $4,121 | | Noninterest income | $49,171 | $62,346 | | Noninterest expense | $93,540 | $109,561 | | Net income attributable to WSFS | $51,145 | $53,882 | | Basic EPS | $1.01 | $1.02 | | Diluted EPS | $1.01 | $1.02 | Consolidated Statements of Income (Nine Months Ended September 30) (Dollars in thousands) | (Dollars in thousands) | 2020 | 2019 | | :--------------------- | :--- | :--- | | Interest income | $383,108 | $383,742 | | Interest expense | $40,154 | $56,363 | | Net interest income | $342,954 | $327,379 | | Provision for credit losses | $154,116 | $23,970 | | Noninterest income | $154,393 | $146,339 | | Noninterest expense | $275,471 | $315,001 | | Net income attributable to WSFS | $54,961 | $103,105 | | Basic EPS | $1.08 | $2.13 | | Diluted EPS | $1.08 | $2.12 | Consolidated Statements of Comprehensive Income This section presents the unaudited consolidated statements of comprehensive income for the three and nine months ended September 30, 2020 and 2019 Consolidated Statements of Comprehensive Income (Three Months Ended September 30) (Dollars in thousands) | (Dollars in thousands) | 2020 | 2019 | | :--------------------- | :--- | :--- | | Net income attributable to WSFS | $51,145 | $53,882 | | Total other comprehensive (loss) income | $(6,185) | $9,531 | | Total comprehensive income | $44,960 | $63,413 | Consolidated Statements of Comprehensive Income (Nine Months Ended September 30) (Dollars in thousands) | (Dollars in thousands) | 2020 | 2019 | | :--------------------- | :--- | :--- | | Net income attributable to WSFS | $54,961 | $103,105 | | Total other comprehensive (loss) income | $43,094 | $47,613 | | Total comprehensive income | $98,055 | $150,718 | Consolidated Statements of Financial Condition This section provides the unaudited consolidated statements of financial condition as of September 30, 2020, and December 31, 2019 Consolidated Statements of Financial Condition (As of September 30, 2020 vs. December 31, 2019) (Dollars in thousands) | (Dollars in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :--------------------- | :----------- | :----------- | | Total assets | $13,830,108 | $12,256,302 | | Total liabilities | $11,968,806 | $10,406,811 | | Total stockholders' equity | $1,861,302 | $1,849,491 | | Loans and leases, net | $9,102,332 | $8,424,464 | | Total deposits | $11,391,345 | $9,586,857 | Consolidated Statements of Changes in Stockholders' Equity This section presents the unaudited consolidated statements of changes in stockholders' equity for the nine months ended September 30, 2020 Changes in Stockholders' Equity (Nine Months Ended September 30, 2020) (Dollars in thousands) | (Dollars in thousands) | Amount | | :--------------------- | :----- | | Balance, December 31, 2019 | $1,849,491 | | Cumulative change in accounting principle (ASC 326) | $(30,368) | | Net income (loss) | $53,579 | | Other comprehensive income | $43,094 | | Cash dividend | $(18,319) | | Issuance of common stock | $1,359 | | Stock-based compensation expense | $1,954 | | Repurchases of common shares | $(39,488) | | Balance, September 30, 2020 | $1,861,302 | Consolidated Statements of Cash Flows This section provides the unaudited consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 Consolidated Statements of Cash Flows (Nine Months Ended September 30) (Dollars in thousands) | (Dollars in thousands) | 2020 | 2019 | | :--------------------- | :--- | :--- | | Net cash provided by operating activities | $48,854 | $74,500 | | Net cash (used in) provided by investing activities | $(1,010,571) | $260,563 | | Net cash provided by (used in) financing activities | $1,462,885 | $(375,521) | | Increase (decrease) in cash, cash equivalents, and restricted cash | $501,168 | $(40,458) | | Cash, cash equivalents, and restricted cash at end of period | $1,072,920 | $580,299 | Notes to the Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, covering presentation, accounting policies, financial line items, and disclosures 1. Basis of Presentation This section outlines the entities included in WSFS Financial Corporation's consolidated financial statements and key business operations - WSFS Financial Corporation (WSFS) includes its subsidiaries WSFS Bank, WSFS Wealth Management, WSFS Capital Management, Cypress Capital Management, Christiana Trust Company of Delaware, and WSFS SPE Services, LLC[27] - The Company's core banking business focuses on commercial lending funded by customer-generated deposits, complemented by wealth management and trust services, operating primarily from 115 offices across five states[28] - NewLane Finance, a majority-owned subsidiary, conducts the Company's leasing business, originating small business leases and commercial financing nationwide[29] - Significant estimates in financial statements include allowance for credit losses, goodwill, intangible assets, post-retirement benefit obligations, fair value of financial instruments, and income taxes[30] 2. Summary of Significant Accounting Policies This section details the company's significant accounting policies, including the adoption of CECL and classification of debt securities - The Company adopted ASC 326, Current Expected Credit Losses (CECL) methodology, on January 1, 2020, resulting in a $30.4 million decrease to the beginning balance of retained earnings[65] - The allowance for credit losses for loans and leases is established based on quantitative and qualitative factors, including portfolio mix, historical loss experience, and economic forecasts, segmented into commercial and retail loans[34][35] - Debt securities are classified as trading, held-to-maturity, or available-for-sale, with available-for-sale securities reported at fair value with unrealized gains/losses in other comprehensive income[51] Impact of ASC 326 Adoption on January 1, 2020 (Dollars in thousands) | Item | Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | | :------------------------------------------ | :------------------- | :------------------------- | | Allowance for credit losses on held-to-maturity debt securities | $0 | $(8) | | Allowance for credit losses on loans and leases | $(47,576) | $(35,855) | | Deferred tax assets | $9,991 | $8,461 | | Allowance for credit losses on unfunded lending commitments | $(1,547) | $(2,966) | | Total ASC 326 impact to retained earnings | | $(30,368) | 3. Noninterest Income This section provides a breakdown of noninterest income components, including credit/debit card, investment management, and deposit service charges - Interchange income decreased quarter-to-date and year-to-date in 2020 compared to 2019 due to the Durbin amendment, effective July 1, 2020[78] Credit/Debit Card and ATM Income (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Bailment fees | $3,311 | $6,580 | $11,472 | $20,387 | | Interchange fees | $3,267 | $6,234 | $14,514 | $17,073 | | Other card and ATM fees | $673 | $301 | $1,930 | $847 | | Total | $7,251 | $13,115 | $27,916 | $38,307 | Investment Management and Fiduciary Income (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Trust fees | $9,303 | $6,632 | $23,565 | $19,884 | | Wealth management and advisory fees | $3,963 | $3,827 | $11,592 | $11,104 | | Total | $13,266 | $10,459 | $35,157 | $30,988 | Deposit Service Charges (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Service fees | $3,116 | $3,188 | $9,246 | $9,083 | | Return and overdraft fees | $1,532 | $2,797 | $4,998 | $7,341 | | Other deposit service fees | $124 | $154 | $350 | $564 | | Total | $4,772 | $6,139 | $14,594 | $16,988 | 4. Earnings Per Share This section presents the basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019 Earnings Per Share (Three Months Ended September 30) (Dollars in thousands) | Metric | 2020 | 2019 | | :---------------------------------- | :--- | :--- | | Net income attributable to WSFS (thousands) | $51,145 | $53,882 | | Weighted average basic shares (thousands) | 50,665 | 52,863 | | Basic EPS | $1.01 | $1.02 | | Diluted EPS | $1.01 | $1.02 | Earnings Per Share (Nine Months Ended September 30) (Dollars in thousands) | Metric | 2020 | 2019 | | :---------------------------------- | :--- | :--- | | Net income attributable to WSFS (thousands) | $54,961 | $103,105 | | Weighted average basic shares (thousands) | 50,802 | 48,381 | | Basic EPS | $1.08 | $2.13 | | Diluted EPS | $1.08 | $2.12 | 5. Investments This section details the company's available-for-sale and held-to-maturity debt securities, including sales and unrealized gains/losses - During the nine months ended September 30, 2020, the Company sold $198.9 million of available-for-sale debt securities, realizing $5.9 million in gains[95] - At September 30, 2020, available-for-sale debt securities with unrealized losses totaled $161.9 million, with total unrealized losses of $0.5 million, primarily due to changes in market interest rates, not credit loss[100] - The Company recorded a net realized gain of $22.1 million from the sale of Visa Class B shares during the nine months ended September 30, 2020[103] Available-for-Sale Debt Securities (September 30, 2020) (Dollars in thousands) | (Dollars in thousands) | Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | | :--------------------- | :------------- | :-------------------- | :-------------------- | :--------- | | CMO | $417,162 | $11,455 | $84 | $428,533 | | FNMA MBS | $1,393,291 | $61,809 | $192 | $1,454,908 | | FHLMC MBS | $232,056 | $14,277 | $109 | $246,224 | | GNMA MBS | $25,637 | $993 | $0 | $26,630 | | GSE agency notes | $176,395 | $2,329 | $97 | $178,627 | | Total | $2,244,541 | $90,863 | $482 | $2,334,922 | Held-to-Maturity Debt Securities (September 30, 2020) (Dollars in thousands) | (Dollars in thousands) | Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Allowance for Credit Losses | Fair Value | | :--------------------- | :------------- | :-------------------- | :-------------------- | :-------------------------- | :--------- | | State and political subdivisions | $113,115 | $4,504 | $0 | $7 | $117,612 | | Foreign bonds | $501 | $0 | $0 | $0 | $501 | | Total | $113,616 | $4,504 | $0 | $7 | $118,113 | 6. Loans This section provides a breakdown of the loan and lease portfolio by category, including the impact of Paycheck Protection Program loans - The commercial and industrial loan category includes $954.2 million in Paycheck Protection Program (PPP) loans at September 30, 2020[105] Loan and Lease Portfolio by Category (Dollars in thousands) | Category | September 30, 2020 | December 31, 2019 | | :-------------------------- | :----------------- | :------------------ | | Commercial and industrial | $2,902,815 | $2,046,798 | | Owner-occupied commercial | $1,344,494 | $1,296,466 | | Commercial mortgages | $2,167,508 | $2,222,976 | | Construction | $666,317 | $581,082 | | Commercial small business leases | $227,539 | $188,630 | | Residential | $857,494 | $1,016,500 | | Consumer | $1,168,891 | $1,128,731 | | Total loans and leases | $9,335,058 | $8,481,183 | | Less: Allowance for credit losses | $232,726 | $47,576 | | Net loans and leases | $9,102,332 | $8,424,464 | 7. Allowance for Credit Losses and Credit Quality Information This section details the allowance for credit losses activity, nonaccrual and past due loans, and troubled debt restructurings - During the nine months ended September 30, 2020, the Company provided various customer relief programs, such as payment deferrals, which are not classified as TDRs under the CARES Act[128][49] Allowance for Credit Losses Activity (Nine Months Ended September 30, 2020) (Dollars in thousands) | Category | Beginning Balance (prior to ASC 326) | Impact of Adopting ASC 326 | Charge-offs | Recoveries | Provision (credit) | Ending Balance | | :------------------------ | :--------------------------------- | :------------------------- | :---------- | :--------- | :----------------- | :------------- | | Commercial and industrial | $22,849 | $19,747 | $(7,390) | $4,038 | $109,285 | $148,529 | | Owner-occupied commercial | $4,616 | $(1,472) | $(336) | $133 | $7,443 | $10,384 | | Commercial mortgages | $7,452 | $1,662 | $(55) | $38 | $25,162 | $34,259 | | Construction | $3,891 | $681 | $0 | $5 | $5,653 | $10,230 | | Residential | $1,381 | $7,522 | $(175) | $141 | $(415) | $8,454 | | Consumer | $7,387 | $7,715 | $(1,955) | $735 | $6,988 | $20,870 | | Total | $47,576 | $35,855 | $(9,911) | $5,090 | $154,116 | $232,726 | Nonaccrual and Past Due Loans (September 30, 2020) (Dollars in thousands) | Category | 30–89 Days Past Due and Still Accruing | Greater Than 90 Days Past Due and Still Accruing | Total Past Due And Still Accruing | Current Balances | Nonaccrual Loans | Total Loans | | :------------------------ | :------------------------------------- | :----------------------------------------------- | :-------------------------------- | :--------------- | :--------------- | :---------- | | Commercial and industrial | $17,314 | $1,040 | $18,354 | $3,097,310 | $14,690 | $3,130,354 | | Owner-occupied commercial | $3,073 | $3,171 | $6,244 | $1,334,228 | $4,022 | $1,344,494 | | Commercial mortgages | $15,290 | $1,399 | $16,689 | $2,149,167 | $1,652 | $2,167,508 | | Construction | $2,799 | $0 | $2,799 | $663,518 | $0 | $666,317 | | Residential | $2,673 | $0 | $2,673 | $839,240 | $3,082 | $844,995 | | Consumer | $10,282 | $6,276 | $16,558 | $1,149,944 | $2,389 | $1,168,891 | | Total | $51,431 | $11,886 | $63,317 | $9,233,407 | $25,835 | $9,322,559 | Troubled Debt Restructurings (TDRs) (Dollars in thousands) | Category | September 30, 2020 | December 31, 2019 | | :----------------- | :----------------- | :------------------ | | Performing TDRs | $15,670 | $14,281 | | Nonperforming TDRs | $4,136 | $5,896 | | Total TDRs | $19,806 | $20,177 | 8. Leases This section provides details on operating lease costs, balance sheet information, and direct financing lease income Operating Lease Cost (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease cost | $4,723 | $5,596 | $14,224 | $14,610 | | Sublease income | $(93) | $(105) | $(279) | $(381) | | Net lease cost | $4,630 | $5,491 | $13,945 | $14,229 | Operating Lease Balance Sheet Information (Dollars in thousands) | Item | September 30, 2020 | December 31, 2019 | | :------------------ | :----------------- | :------------------ | | Right of use assets | $154,007 | $166,221 | | Lease liabilities | $169,058 | $181,814 | | Weighted average remaining lease term | 19.37 years | 19.06 years | | Weighted average discount rate | 4.25% | 4.17% | Direct Financing Lease Income (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest income on lease receivable | $3,965 | $2,048 | $11,344 | $5,826 | | Interest income on deferred fees and costs | $117 | $63 | $304 | $326 | | Total | $4,082 | $2,111 | $11,648 | $6,152 | 9. Goodwill and Intangible Assets This section details goodwill and intangible assets, including their carrying values, amortization, and impairment assessment - Goodwill remained at $472.8 million at September 30, 2020, with no impairment recognized during the nine months ended September 30, 2020, following management's qualitative assessment considering the COVID-19 economic environment[141][142] - Amortization expense on intangible assets was $2.7 million for the three months and $8.2 million for the nine months ended September 30, 2020[143] Intangible Assets (September 30, 2020) (Dollars in thousands) | Intangible Asset | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | Amortization Period | | :------------------- | :---------------------- | :----------------------- | :-------------------- | :------------------ | | Core deposits | $95,711 | $(20,384) | $75,327 | 10 years | | Customer relationships | $15,281 | $(6,281) | $9,000 | 7-15 years | | Non-compete agreements | $221 | $(179) | $42 | 5 years | | Loan servicing rights | $4,819 | $(2,210) | $2,609 | 10-25 years | | Total | $116,032 | $(29,054) | $86,978 | | 10. Deposits This section provides a breakdown of total deposits by category as of September 30, 2020, and December 31, 2019 Deposits by Category (Dollars in thousands) | Category | September 30, 2020 | December 31, 2019 | | :-------------------------- | :----------------- | :------------------ | | Noninterest-bearing demand | $3,196,967 | $2,189,573 | | Interest-bearing demand | $2,521,030 | $2,129,725 | | Savings | $1,717,952 | $1,563,000 | | Money market | $2,488,794 | $2,100,188 | | Customer time deposits | $1,223,843 | $1,356,610 | | Brokered deposits | $242,759 | $247,761 | | Total deposits | $11,391,345 | $9,586,857 | 11. Associate Benefit Plans This section details the net periodic benefit costs for postretirement medical benefits and the Alliance Associate Pension Plan - The Company completed the termination of the Alliance pension plan in the first quarter of 2020, contributing $0.5 million to settle the obligation[155] Net Periodic Benefit Cost - Postretirement Medical Benefits (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Service cost | $15 | $13 | $45 | $40 | | Interest cost | $17 | $20 | $51 | $58 | | Prior service cost amortization | $(19) | $(19) | $(57) | $(57) | | Net gain recognition | $(9) | $(16) | $(27) | $(47) | | Net periodic cost (benefit) | $4 | $(2) | $12 | $(6) | Net Periodic Benefit Cost - Alliance Associate Pension Plan (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Service cost | $0 | $10 | $17 | $30 | | Interest cost | $0 | $70 | $105 | $208 | | Expected return on plan assets | $0 | $(150) | $(196) | $(445) | | Plan settlement loss | $0 | $0 | $1,431 | $0 | | Net periodic cost (benefit) | $0 | $(70) | $1,357 | $(207) | 12. Income Taxes This section discusses income tax benefits, deferred tax assets, and expenses related to NOL carryback claims and low-income housing credits - The Company recognized an additional $1.7 million income tax benefit and deferred tax asset at September 30, 2020, due to the revaluation of Net Operating Losses (NOLs) carryback claims under the CARES Act from 21% to 35% tax rate[162] - The tax impact relating to the adoption of ASC 326 resulted in an $8.5 million income tax credit and deferred tax asset[161] - Amortization of low-income housing credit investments resulted in income tax expense of $0.8 million and $2.4 million for the three and nine months ended September 30, 2020, respectively[163] 13. Fair Value Disclosures of Financial Assets and Liabilities This section categorizes fair value measurements into a three-level hierarchy and presents assets measured at fair value on recurring and nonrecurring bases - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable market data), and Level 3 (significant unobservable inputs)[167] - Available-for-sale securities are primarily valued using Level 2 inputs from independent pricing services, while other investments and other real estate owned use Level 3 inputs[170][171][172] Assets Measured at Fair Value on a Recurring Basis (September 30, 2020) (Dollars in thousands) | Asset | Level 1 | Level 2 | Level 3 | Total Fair Value | | :-------------------------- | :------ | :------ | :------ | :--------------- | | Available-for-sale securities | $0 | $2,334,922 | $0 | $2,334,922 | | Other assets | $0 | $18,448 | $0 | $18,448 | | Total | $0 | $2,353,370 | $0 | $2,353,370 | Assets Measured at Fair Value on a Nonrecurring Basis (September 30, 2020) (Dollars in thousands) | Asset | Level 1 | Level 2 | Level 3 | Total Fair Value | | :------------------ | :------ | :------ | :------ | :--------------- | | Other investments | $0 | $0 | $10,436 | $10,436 | | Other real estate owned | $0 | $0 | $3,000 | $3,000 | | Loans held for sale | $0 | $152,453 | $0 | $152,453 | | Total | $0 | $152,453 | $13,436 | $165,889 | 14. Derivative Financial Instruments This section provides fair value disclosures for derivative instruments, including interest rate products, risk participation agreements, and forward sale commitments - In April 2020, the Company terminated three interest rate derivatives designated as cash flow hedges for a net gain of $1.3 million, which will be reclassified into earnings over the original contract term[203] - The Company has swap guarantees with a fair value of $12.2 million at September 30, 2020, for customer interest rate swap transactions with third-party financial institutions, with an initial notional aggregate amount of approximately $1.1 billion[205] Fair Values of Derivative Instruments (September 30, 2020) (Dollars in thousands) | Instrument | Notional | Balance Sheet Location | Derivatives (Fair Value) | | :------------------------------------------ | :------- | :--------------------- | :----------------------- | | Interest rate products (asset) | $65,068 | Other assets | $6,339 | | Interest rate products (liability) | $65,068 | Other liabilities | $(7,067) | | Risk participation agreements | $4,410 | Other liabilities | $(12) | | Interest rate lock commitments with customers (asset) | $308,807 | Other assets | $11,606 | | Interest rate lock commitments with customers (liability) | $22,134 | Other liabilities | $(174) | | Forward sale commitments (asset) | $56,290 | Other assets | $503 | | Forward sale commitments (liability) | $245,224 | Other liabilities | $(1,097) | | Financial derivatives related to sales of certain Visa Class B shares | $113,177 | Other liabilities | $(25,205) | | Total derivatives | $880,178 | | $(15,107) | 15. Segment Information This section outlines the company's three operating segments: WSFS Bank, Cash Connect®, and Wealth Management, and their respective income before taxes - The Company operates through three segments: WSFS Bank, Cash Connect®, and Wealth Management, with performance evaluated based on pretax net income[211] - WSFS Bank segment provides financial products to commercial and retail customers, including commercial real estate lending and other banking services[211] - Cash Connect® provides ATM vault cash, smart safe, and other cash logistics services nationwide, managing over $1.4 billion in total cash[212] - Wealth Management segment offers planning, advisory, investment management, and trust services to individual, corporate, and institutional clients[212] Income Before Taxes by Segment (Nine Months Ended September 30) (Dollars in thousands) | Segment | 2020 | 2019 | | :-------------- | :----- | :------ | | WSFS Bank | $47,026 | $108,890 | | Cash Connect® | $7,073 | $4,981 | | Wealth Management | $13,661 | $20,876 | | Total | $67,760 | $134,747 | 16. Commitments and Contingencies This section discusses the company's commitments and contingencies, including residential mortgage loan sales and the allowance for unfunded lending commitments - The Company typically sells newly originated residential mortgage loans in the secondary market, retaining servicing rights periodically or selling with servicing released on a nonrecourse basis, except for standard representations and warranties[218] - The allowance for credit losses for unfunded lending commitments was $8.6 million at September 30, 2020, an increase from $1.5 million at December 31, 2019, primarily due to the CECL methodology adoption[220] 17. Change in Accumulated Other Comprehensive Income This section details the changes in accumulated other comprehensive income, including reclassifications to the Consolidated Statements of Income - Total reclassifications from accumulated other comprehensive income to the Consolidated Statements of Income were $(2.76) million for the three months and $(4.81) million for the nine months ended September 30, 2020[225][226] Accumulated Other Comprehensive Income (September 30, 2020) (Dollars in thousands) | Component | Balance, June 30, 2020 | Net current-period other comprehensive loss | Balance, September 30, 2020 | | :------------------------------------------------ | :--------------------- | :---------------------------------------- | :-------------------------- | | Net change in investment securities available-for-sale | $74,689 | $(5,999) | $68,690 | | Net change in investment securities held-to-maturity | $346 | $(39) | $307 | | Net change in defined benefit plan | $(3,127) | $(25) | $(3,152) | | Net change in fair value of derivatives used for cash flow hedges | $872 | $(113) | $759 | | Net change in equity method investments | $0 | $(9) | $(9) | | Total | $72,780 | $(6,185) | $66,595 | 18. Related Party Transactions This section provides information on outstanding balances of loans to and deposits from related parties - Outstanding balances of loans to related parties were $0.2 million at September 30, 2020, down from $1.0 million at December 31, 2019[229] - Total deposits from related parties increased to $9.2 million at September 30, 2020, from $4.9 million at December 31, 2019[229] 19. Legal and Other Proceedings This section outlines ongoing legal proceedings, including recovery efforts related to a settlement and defense against a complaint - The Company is pursuing recovery of remaining amounts related to the Universitas settlement, including the settlement payment, legal fees, and related costs[232] - WSFS Bank is vigorously defending itself against a complaint filed by Nature's Healing Trust (NHT) alleging failure to provide timely notice concerning the possible lapse of two life settlement policies[233] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition, capital, liquidity, nonperforming assets, interest rate sensitivity, and results of operations, highlighting COVID-19 impacts Overview This section provides an overview of WSFS Financial Corporation, its business segments, and the significant impact of the COVID-19 pandemic - WSFS Financial Corporation is a savings and loan holding company, with WSFS Bank being the largest bank and trust company headquartered in the Delaware Valley, operating for over 188 years[236] - The Company's business segments include banking (commercial and consumer lending, retail deposits), Cash Connect® (ATM vault cash, smart safe, cash logistics), and Wealth Management (advisory, investment, trust services)[238][239] - The COVID-19 pandemic led to a $154.1 million increase in provision for credit losses for the nine months ended September 30, 2020, due to acute deterioration in economic forecasts and portfolio credit migration[240] - WSFS provided nearly $1.0 billion in PPP loans to over 5,400 customers and recorded $2.4 million in PPP-related costs for the nine months ended September 30, 2020[240] - Net realized gains of $22.1 million were recorded from the sale of Visa Class B shares during the nine months ended September 30, 2020[240] Financial Condition, Capital Resources and Liquidity This section analyzes the company's financial condition, capital resources, and liquidity, including asset and liability changes and regulatory capital ratios - Total assets increased by $1.6 billion to $13.8 billion at September 30, 2020, driven by increases in net loans (including $954.2 million from PPP loans), cash and cash equivalents, and available-for-sale investment securities[242] - Total liabilities increased by $1.6 billion to $12.0 billion, primarily due to a $1.8 billion increase in total deposits, reflecting elevated customer funding from PPP loans and government stimulus[243] - The Company temporarily suspended share repurchases through Q3 2020 due to COVID-19 but approved resumption in Q4 2020, having completed a $38.7 million repurchase program in Q1 2020[244] - Cash, cash equivalents, and restricted cash increased by $501.2 million to $1.1 billion at September 30, 2020, with cash provided by financing activities totaling $1.5 billion, primarily from increased deposits[254] Regulatory Capital Ratios (September 30, 2020) | Capital Ratio | Wilmington Savings Fund Society, FSB | WSFS Financial Corporation | | :------------------------------------ | :--------------------------------- | :------------------------- | | Total Capital (to Risk-Weighted Assets) | 14.50% | 14.47% | | Tier 1 Capital (to Risk-Weighted Assets) | 13.24% | 13.21% | | Common Equity Tier 1 Capital (to Risk-Weighted Assets) | 13.24% | 12.57% | | Tier 1 Leverage Capital | 10.31% | 10.30% | Nonperforming Assets This section details nonperforming assets, past due loans, and the impact of COVID-19 loan modifications on the portfolio - Nonperforming assets increased by $4.7 million between December 31, 2019, and September 30, 2020, primarily due to one commercial relationship moving to non-accrual status[257] Nonperforming Assets and Past Due Loans (Dollars in thousands) | Category | September 30, 2020 | December 31, 2019 | | :-------------------------- | :----------------- | :------------------ | | Total nonaccruing loans | $25,835 | $22,922 | | Other real estate owned | $3,000 | $2,605 | | Restructured loans (accruing only) | $15,670 | $14,281 | | Total nonperforming assets | $44,505 | $39,808 | | Total past due loans | $11,886 | $16,150 | | Ratio of allowance for credit losses to total loans and leases | 2.47% | 0.56% | | Ratio of nonperforming assets to total assets | 0.32% | 0.32% | COVID-19 Loan Modifications by Portfolio Segment (Dollars in thousands) | Portfolio Segment | October 15, 2020 Loan Balances | September 30, 2020 Loan Balances | June 30, 2020 Loan Balances | | :-------------------------- | :----------------------------- | :----------------------------- | :-------------------------- | | Commercial and industrial | $94,278 | $139,856 | $675,724 | | Owner-occupied commercial | $9,764 | $10,643 | $380,432 | | Commercial mortgages | $53,005 | $53,122 | $700,889 | | Construction | $1,744 | $1,748 | $109,861 | | Residential | $34,954 | $34,985 | $86,581 | | Consumer | $38,304 | $42,406 | $65,162 | | Total | $232,049 | $282,760 | $2,018,649 | Interest Rate Sensitivity This section discusses the company's management of interest rate risk and the estimated impact of rate changes on net interest margin and economic value of equity - The Company manages interest rate risk primarily through its asset/liability structure, aiming to minimize adverse impacts on net interest income and capital[261] - At September 30, 2020, interest-earning assets exceeded interest-bearing liabilities maturing or repricing within one year by $1.0 billion, with an interest-sensitive assets to liabilities ratio of 118.92%[262] Estimated Impact of Immediate Changes in Interest Rates on Net Interest Margin (NIM) and Economic Value of Equity (EVE) (September 30, 2020) | % Change in Interest Rate (Basis Points) | % Change in Net Interest Margin | Economic Value of Equity | | :--------------------------------------- | :------------------------------ | :----------------------- | | +300 | 13.9% | 18.16% | | +200 | 9.2% | 17.74% | | +100 | 4.4% | 17.05% | | +50 | 2.1% | 16.57% | | +25 | 1.0% | 16.30% | | — | —% | 16.02% | | -25 | (0.7)% | 15.68% | | -50 | (1.1)% | 15.17% | | -100 | (1.3)% | 14.77% | Results of Operations This section analyzes the company's net income, net interest income, net interest margin, and provision for credit losses for the periods presented - Net interest income decreased by $7.8 million for the three months ended September 30, 2020, primarily due to a lower interest rate environment, partially offset by $6.4 million from PPP loans[272] - Net interest margin was 3.66% for Q3 2020, a 72 basis point decrease YoY, mainly due to lower interest rates, reduced purchase accounting accretion, and increased short-term liquidity[272] - Provision for credit losses increased by $130.1 million for the nine months ended September 30, 2020, to $154.1 million, primarily due to the COVID-19 pandemic's impact on CECL models and loan migration[276] - The allowance for credit losses increased to $232.7 million at September 30, 2020, from $47.6 million at December 31, 2019, with $35.9 million from CECL adoption and $154.1 million from additional provision[277] Net Income Attributable to WSFS (Dollars in millions) | Period | 2020 | 2019 | | :-------------------------- | :--- | :--- | | Three months ended Sep 30 | $51.1 | $53.9 | | Nine months ended Sep 30 | $55.0 | $103.1 | Noninterest Income and Noninterest Expense This section analyzes changes in noninterest income and noninterest expense, highlighting key drivers such as equity investments, interchange fees, and restructuring costs - Noninterest income decreased by $13.2 million for the three months ended September 30, 2020, primarily due to lower unrealized gains on equity investments and reduced interchange fees (Durbin amendment), partially offset by increased mortgage banking activities and trust services revenue[280] - Noninterest expense decreased by $16.0 million for the three months ended September 30, 2020, mainly due to lower corporate development and restructuring costs related to the Beneficial acquisition, partially offset by a $2.3 million loss on early extinguishment of debt[283] - For the nine months ended September 30, 2020, noninterest income increased by $8.1 million, driven by mortgage banking activities, securities gains, and investment management/fiduciary revenue, despite lower interchange fees and deposit service charges[281] - Noninterest expense decreased by $39.5 million for the nine months ended September 30, 2020, primarily due to lower corporate development and restructuring costs, partially offset by higher employee-related costs, professional fees, credit-related costs, and a $3.0 million contribution to the WSFS Community Foundation[284] Income Taxes and Contractual Obligations This section discusses the effective tax rate, its drivers, and the stability of contractual obligations for the periods presented - The effective tax rate was 23.0% for the three months and 20.9% for the nine months ended September 30, 2020, compared to 22.9% and 23.9% for the same periods in 2019[287] - The decrease in the effective tax rate for the nine months was due to the absence of non-deductible acquisition costs (Beneficial acquisition in 2019) and a $1.7 million tax benefit from NOL carryback claims under the CARES Act[287] - Contractual obligations at September 30, 2020, did not significantly change from December 31, 2019[290] Reconciliation of Non-GAAP Measure to GAAP Measure and Critical Accounting Estimates This section reconciles tangible book value per share and discusses critical accounting estimates, noting their consistency with prior periods - Critical accounting estimates, including those for allowance for credit losses, deferred taxes, fair value measurements, goodwill, and other intangible assets, did not significantly change from prior periods, but actual conditions may differ from estimates[294][295] Tangible Book Value Per Share Reconciliation (Dollars and share amounts in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :------------------------------------ | :----------------- | :------------------ | | Stockholders' equity of WSFS | $1,863,499 | $1,850,306 | | Less: Goodwill and other intangible assets | $559,806 | $568,745 | | Tangible common equity | $1,303,693 | $1,281,561 | | Shares of common stock outstanding | 50,673 | 51,567 | | Book value per share of common stock | $36.77 | $35.88 | | Tangible book value per share of common stock | $25.73 | $24.85 | Recent Regulatory Developments This section discusses recent regulatory developments, including the CARES Act, PPP loans, loan modifications, and the transition away from LIBOR - The CARES Act led to the Paycheck Protection Program (PPP), through which WSFS Bank provided nearly $1.0 billion in loans to over 5,400 customers[298][299] - The Company modified approximately $2.1 billion of loans and leases under customer relief programs due to COVID-19, which are generally not required to be reported as troubled debt restructurings[300] - The CARES Act allowed the Company to revalue NOL carryback claims at a 35% tax rate, resulting in an additional tax benefit[301] - The Company is actively monitoring and managing the transition away from LIBOR to alternative reference rates like SOFR, with approximately $1.7 billion in LIBOR-indexed loans and $1.0 billion in derivatives maturing after 2021[303][304] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures by reference from the 'Interest Rate Sensitivity' section of Management's Discussion and Analysis - Information on quantitative and qualitative disclosures about market risk is incorporated by reference from the 'Interest Rate Sensitivity' section in Item 2 Part I of this report[305] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2020[309] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2020[309] PART II. Other Information This part includes legal proceedings, risk factors, equity security sales, and other required disclosures Item 1. Legal Proceedings This section refers to Note 19 of the Consolidated Financial Statements for information regarding legal proceedings - Information on legal proceedings is incorporated by reference from Note 19 to the unaudited Consolidated Financial Statements[308] Item 1A. Risk Factors This section updates risk factors, emphasizing the adverse impact of the COVID-19 pandemic on the company's business, financial condition, and operations - The COVID-19 pandemic and mitigation actions could adversely affect the Company's business, financial condition, and results of operations[311] - Key impacts of COVID-19 include impaired borrower repayment ability, reduced collateral value, increased allowance for credit losses (especially with CECL adoption), adverse effects on liquidity and fee-based revenues, and increased compliance and operational risks[313][314] - A substantial portion of loans currently in forbearance may need to be classified as problem loans when forbearance periods end[316] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase programs, including completion, new approvals, and temporary suspension/resumption due to COVID-19 - The Company completed its share repurchase program (approved in Q4 2018) in Q1 2020[319] - A new share repurchase program authorizing 15% of outstanding shares was approved in Q1 2020 but was temporarily suspended due to COVID-19[319] - The Board of Directors approved the resumption of share repurchases in Q4 2020, consistent with the intent to return a minimum of 25% of annual net income to stockholders[320] Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company Item 5. Other Information This section states that there is no other information to report Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents - The report includes certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32) and XBRL Instance, Schema, Calculation, Labels, Presentation, and Definition Linkbase Documents (Exhibits 101.INS to 101.DEF)[325] Signatures This section indicates the report was signed by the Chairman, President, CEO, and Executive Vice President, CFO on November 4, 2020 - The report was signed on November 4, 2020, by Rodger Levenson, Chairman, President and Chief Executive Officer, and Dominic C. Canuso, Executive Vice President and Chief Financial Officer[331]