WSFS FINANCIAL CORPORATION WSFS Financial Corporation (the Company or WSFS) is a savings and loan holding company headquartered inWilmington, Delaware . Substantially all of our assets are held by the Company's subsidiary,Wilmington Savings Fund Society , FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies inthe United States (U.S. ) continuously operating under the same name. With$14.3 billion in assets and$24.2 billion in assets under management (AUM) and assets under administration (AUA) atDecember 31, 2020 ,WSFS Bank is the oldest and largest locally-managed bank and trust company headquartered in theDelaware andGreater Philadelphia region. As a federal savings bank that was formerly chartered as a state mutual savings bank,WSFS Bank enjoys a broader scope of permissible activities than most other financial institutions. A fixture in the community, we have been in operation for more than 189 years. In addition to our focus on stellar customer experience, we have continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution. Our mission is simple: "We Stand for Service." Our strategy of "Engaged Associates , living our culture, making a better life for all we serve" focuses on exceeding customer expectations, delivering stellar experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates. As ofDecember 31, 2020 , we service our customers primarily from our 112 offices located inPennsylvania (52),Delaware (42),New Jersey (16)Virginia (1) andNevada (1), our ATM network, our website at www.wsfsbank.com, and our mobile apps. We have six consolidated subsidiaries:WSFS Bank ,WSFS Wealth Management, LLC (Powdermill®),WSFS Capital Management, LLC (West Capital ),Cypress Capital Management, LLC (Cypress),Christiana Trust Company of Delaware® (Christiana Trust DE) andWSFS SPE Services, LLC . We also have one unconsolidated subsidiary, WSFS Capital Trust III.WSFS Bank has three wholly owned subsidiaries:Beneficial Equipment Finance Corporation (BEFC),WSFS Investment Group, Inc. (WSFS Wealth® Investments), and 1832Holdings, Inc. , and one majority-owned subsidiary,NewLane Finance Company (NewLane Finance®). Our banking business had a total loan and lease portfolio of$9.0 billion as ofDecember 31, 2020 , which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a$7.1 billion commercial loan and lease portfolio by recruiting seasoned commercial lenders in our markets, offering the high level of service and flexibility typically associated with a community bank and through acquisitions. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches, and mortgage and title services through our branches and 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®. NewLane Finance® originates small business leases and provides commercial financing to businesses nationwide, targeting various equipment categories including technology, software, office, medical, veterinary and other areas. In addition, NewLane Finance® offers new product offerings for insurance through a newly-formed subsidiary, Prime Protect, which commenced operations during the fourth quarter of 2020. Our Cash Connect® business is a premier provider of ATM vault cash, smart safe (safes that automatically accept, validate, record and hold cash in a secure environment) and other cash logistics services in theU.S. Cash Connect® manages approximately$1.6 billion in total cash and services approximately 27,900 non-bank ATMs and approximately 4,500 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 supports over 600 owned and branded ATMs forWSFS Bank Customers, which has one of the largest branded ATM networks in our market. 49 -------------------------------------------------------------------------------- Our Wealth Management business provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate and institutional clients through multiple integrated businesses. Combined, these businesses had$24.2 billion of AUM and AUA atDecember 31, 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 trust division of WSFS, comprised of WSFS Institutional Services® andChristiana Trust DE, provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients. Christiana Trust DE, a subsidiary of WSFS, provides personal trust and fiduciary services to families and individuals across theU.S. Powdermill® is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Client Management serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management businesses to provide comprehensive solutions to clients. Notable Items Impacting Results of Operations, Financial Condition and Business Outlook Our results in 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 allowance for credit losses. Contributing to the magnitude of the pandemic's effect is our adoption, as ofJanuary 1, 2020 , of, the Current Expected Credit Loss (CECL) method of accounting, which considers forward-looking information when establishing reserves for credit losses. Notable items in 2020 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$153.2 million for the year endedDecember 31, 2020 . Including the impact of our adoption of CECL, the allowance for credit losses increased by$181.2 million during the year endedDecember 31, 2020 . We continue to incur other costs related to COVID-19 as we navigate through the pandemic. During the year endedDecember 31, 2020 , we recorded$4.9 million of such other COVID-19 related costs. The COVID-19 pandemic has also contributed to a lower interest rate environment, impacting our asset/liability management strategies. See "Quantitative and Qualitative Disclosures About Market Risk" and "Results of Operations" for further details. •We participated 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). We have provided nearly$1.0 billion in PPP loans to more than 5,400 new and existing WSFS Customers, which resulted in$21.7 million of additional interest income from PPP loans and$3.3 million of PPP related costs during the year endedDecember 31, 2020 . We experienced an increase in deposits and liquidity due to these PPP loans and the current economic environment. See "Financial Condition," "Results of Operations" and "Regulation" for further details. •InJune 2020 , 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 the first quarter of 2018, cumulative realized and unrealized gains and dividends on Visa Class B shares have totaled$78.1 million . •During 2020, we repurchased 3,950,855 shares of WSFS common stock totaling$155.1 million , which included 2,946,507 shares totaling$116.3 million during the fourth quarter of 2020 as we resumed our common stock repurchase program. •InDecember 2020 , WSFS issued$150.0 million of fixed-to-floating rate senior notes due 2030 with a fixed interest rate of 2.75% for the first five years, and afterwards at an annual floating rate equal to a benchmark rate expected to be three-month term SOFR (as defined in the senior notes) plus 2.485%. For a discussion of additional risk factors relating to COVID-19, see "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 forgiveness 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. 50 -------------------------------------------------------------------------------- The continuation of these conditions including whether due to a resurgence of COVID-19 infections, particularly as the geographic areas in which we operate begin to re-open, how quickly and to what extent normal economic and operating conditions can resume, especially as a vaccine becomes widely available, as well as the impacts of the CARES Act and other federal and state measures, specifically with respect to loan forbearances, 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 "Risk Factors." FINANCIAL CONDITION Total assets increased$2.1 billion , or 17%, to$14.3 billion as ofDecember 31, 2020 , compared to$12.3 billion as ofDecember 31, 2019 . These increases are primarily comprised of the following (in descending order of magnitude): •Cash, cash equivalents, and restricted cash: Cash, cash equivalents, and restricted cash increased$1.1 billion , or 189%, primarily reflecting excess cash held due to increased deposits related to PPP loans and CARES Act payments. •Investment securities, available-for-sale: Investment securities, available for sale increased$584.1 million , or 30%, primarily due to$1.5 billion in purchases and favorable market-value changes on available-for-sale securities of$33.0 million , partially offset by repayments of$606.2 million and sales of$305.8 million . •Loans, net of allowance: Loans, net of allowance, increased$371.5 million , or 4%, which included: •An increase of$751.2 million from PPP loans, in addition to growth in construction, owner-occupied commercial, and commercial small business leases, as well as an increase in home equity installment loans originated through our partnership with Spring EQ; partially offset by •A decline during the year of$423.5 million from residential and commercial real estate, primarily in the non-relationship run-off portfolios predominantly acquired from theBeneficial Bancorp, Inc. (Beneficial) acquisition; and •An increase of$181.2 million in the allowance for credit losses, primarily from$153.2 million of provision for credit losses during the year due to the implementation of CECL inJanuary 2020 , as well as the acute deterioration in the economic forecast used in our CECL models related to the impact of the COVID-19 pandemic, and loan migration that occurred during the year in several specific portfolios, mainly in the accommodation, retail and food service industries. •Loans, held for sale: Loans, held for sale are recorded at fair value and increased$113.7 million , driven by an increase in residential mortgage loan originations. •Other assets: Other assets increased$33.9 million , or 13%, primarily due to an increase in our deferred tax asset from the large nondeductible provision for credit losses (as described above) combined with the taxable gain from the sale of Visa Class B shares (as described below). •Other investments: Other investments decreased$60.5 million , or 86%, as we sold 360,000 Visa Class B shares during the second quarter of 2020. •Investment securities, held-to-maturity: Investment securities, held-to-maturity decreased$21.9 million , or 16%, primarily reflecting repayments, maturities and calls during the year. Total liabilities increased$2.1 billion , or 21%, to$12.5 billion atDecember 31, 2020 compared to the prior year, primarily comprised of the following (in descending order of magnitude): •Total Deposits: Total deposits increased$2.3 billion , or 24%, to$11.9 billion , primarily due to an increase in customer funding during the COVID-19 pandemic, which reflected elevated deposits from Customers who received PPP loans, the impact of government stimulus and lower customer spending. The ratio of loans to customer deposits (excludes brokered deposits) was 77% atDecember 31, 2020 reflecting significant liquidity capacity. •Borrowings: Borrowings increased primarily due to the net proceeds of$147.8 million received inDecember 2020 from the issuance of senior notes due 2030. •Federal funds purchased: Federal funds purchased decreased$195.0 million , due to paydowns of these borrowings, as a result of the significant liquidity provided by the increase in customer funding, as described above. We did not have any securities sold under repurchase agreements atDecember 31, 2020 . •FHLB advances: FHLB advances decreased$106.1 million due to the termination of fixed rate FHLB term advances as part of our routine balance sheet and liquidity management. 51 -------------------------------------------------------------------------------- Stockholders' Equity Stockholders' equity decreased$58.6 million to$1.8 billion atDecember 31, 2020 compared to$1.9 billion atDecember 31, 2019 primarily due to decreases of$155.8 million related to share repurchases, and$24.4 million in common stock dividends paid during 2020. These decreases in stockholders' equity were partially offset by earnings of$114.8 million during the year and$32.5 million in favorable market-value changes on available-for-sale securities. We repurchased 3,950,855 and 2,132,390 shares of our common stock in 2020 and 2019 respectively. We held 9,819,627 shares and 5,868,772 shares of our common stock as treasury shares atDecember 31, 2020 and 2019, respectively. CAPITAL RESOURCES Regulatory capital requirements for the Bank and the Company include a minimum common equity Tier 1 capital ratio of 4.50% of risk-weighted assets, a Tier 1 capital ratio of 6.00% of risk-weighted assets, a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets. PPP loans receive a zero percent risk weighting under the regulators' capital rules. In order to avoid limits on capital distributions and discretionary bonus payments, the Bank and the Company must maintain a capital conservation buffer of 2.5% of common equity Tier 1 capital over each of the risk-based capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution's capital tier depends upon its capital levels in relation to various relevant capital measures, which include leveraged and risk-based capital measures and certain other factors. Under the Prompt Corrective Action framework of theFederal Deposit Insurance Corporation Act, depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. AtDecember 31, 2020 ,WSFS Bank was in compliance with regulatory capital requirements and all of its regulatory ratios exceeded "well-capitalized" regulatory benchmarks.WSFS Bank's December 31, 2020 common equity Tier 1 capital ratio of 12.50%, Tier 1 capital ratio of 12.50%, total risk based capital ratio of 13.76% and Tier 1 leverage capital ratio of 9.74%, all remain substantially in excess of "well-capitalized" regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in the Bank's capital, the holding company held$244.9 million in cash to support potential dividends, acquisitions and strategic growth plans. As 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 day-one adverse effects on regulatory capital that may result from the adoption of CECL over a three-year period, which began for us onJanuary 1, 2020 . In addition, the final rule revises the agencies' regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL, and makes conforming amendments to other regulations that reference allowance for credit losses. 52 -------------------------------------------------------------------------------- Table of Contents As a result of the three-year phase-in period related to our CECL adoption, the impact (by bps) to our capital ratios were as follows: December 31, 2020 (Dollars in thousands) As Reported Proforma(1) CECL Impact Total Capital (to Risk-Weighted Assets) Wilmington Savings Fund Society, FSB 13.76 % 13.83 % (0.07) % WSFS Financial Corporation 13.76 % 13.82 % (0.06) % Tier 1 Capital (to Risk-Weighted Assets) Wilmington Savings Fund Society, FSB 12.50 % 12.58 % (0.08) % WSFS Financial Corporation 12.50 % 12.57 % (0.07) %
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
12.50 % 12.58 % (0.08) %
WSFS Financial Corporation 11.87 % 11.94 % (0.07) %
Tier 1 Leverage Capital
Wilmington Savings Fund Society, FSB 9.74 % 9.79 % (0.05) %
WSFS Financial Corporation 9.76 % 9.81 % (0.05) %
(1) Includes the full impact of CECL, not accounting for the three-year phase-in
period we have elected to use.
In 2021, we plan to invest $17.5 million in our Delivery Transformation
initiative to increase adoption and usage of digital channels aligned with our
strategy. Our organization is committed to product and service innovation as a
means to drive growth and to stay ahead of changing customer demands and
emerging competition. We are focused on developing and maintaining a strong
"culture of innovation" that solicits, captures, prioritizes and executes
innovation initiatives, including feedback from our customers, as well as
leveraging technology from product creation to process improvements.
LIQUIDITY
We manage our liquidity and funding needs through our Treasury function and our
Asset/Liability Committee. We have a policy that separately addresses liquidity,
and management monitors our adherence to policy limits. Also, liquidity risk
management is a primary area of examination by the banking regulators.
Funding sources to support growth and meet our liquidity needs include cash from
operations, commercial and retail deposit programs, loan repayments, FHLB
borrowings, repurchase agreements, access to the Federal Reserve Discount
Window, and access to the brokered deposit market as well as other wholesale
funding avenues. In addition, we have a large portfolio of high-quality, liquid
investments, primarily short-duration mortgage-backed securities, that provide a
near-continuous source of cash flow to meet current cash needs, or can be sold
to meet larger discrete needs for cash. We believe these sources are sufficient
to meet our funding needs as well as maintain required and prudent levels of
liquidity over the next twelve months.
During the year ended December 31, 2020 , cash, cash equivalents and restricted
cash increased $1.1 billion to $1.7 billion from $571.8 million as of
December 31, 2019 . Cash provided by operating activities was $15.1 million ,
primarily reflecting the cash impact of earnings and gains of $22.8 million from
the sale of debt and equity securities (including Visa Class B shares), offset
by a $118.1 million increase in net activity from loans held for sale during the
year ended December 31, 2020 . Cash used in investing activities was $874.9
million primarily due to net purchases of available-for-sale debt securities of
$848.5 million and $449.1 million from increased lending activity related to PPP
loans in 2020 (net of forgiveness), partially offset by proceeds of $305.8
million from sales of debt securities and net proceeds of $85.9 million from the
sale of Visa Class B shares. Cash provided by financing activities was $1.9
billion , primarily due to a $2.3 billion net increase in deposits, as a result
of the increase in customer funding discussed above, and $147.8 million from the
issuance of senior notes due 2030, partially offset by $195.0 million for
repayment of federal funds purchased, $155.8 million for repurchases of common
stock under the previously announced stock repurchase plan, $106.1 million for
repayment of FHLB advances due to the termination of fixed rate FHLB term
advances as part of our routine balance sheet and liquidity management and
common stock dividends of $24.4 million .
53
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Table of Contents
NONPERFORMING ASSETS
Nonperforming assets (NPAs) include nonaccruing loans, other real estate owned
(OREO) and restructured loans. Nonaccruing loans are those on which the accrual
of interest has ceased. Loans are placed on nonaccrual status immediately if, in
the opinion of management, collection is doubtful, or when principal or interest
is past due 90 days or more and the value of the collateral is insufficient to
cover principal and interest. Interest accrued but not collected at the date a
loan is placed on nonaccrual status is reversed and charged against interest
income. In addition, the amortization of net deferred loan fees is suspended
when a loan is placed on nonaccrual status. Subsequent cash receipts are applied
either to the outstanding principal balance or recorded as interest income,
depending on management's assessment of the ultimate collectability of principal
and interest. Past due loans are defined as loans contractually past due 90 days
or more as to principal or interest payments but which remain in accrual status
because they are considered well secured and in the process of collection.
The following table shows our nonperforming assets and past due loans at the
dates indicated:
At December 31,
(Dollars in thousands) 2020(1) 2019 2018 2017 2016
Nonaccruing loans:
Commercial and industrial $ 13,816 $ 11,031 $ 14,056 $ 19,057 $ 2,015
Owner-occupied commercial 5,360 4,060 4,406 3,654 2,078
Commercial mortgages 17,175 1,626 3,951 5,870 9,821
Construction - - 2,781 1,804 -
Residential 3,247 4,490 2,854 4,124 4,967
Consumer 2,310 1,715 2,006 1,927 3,995
Total nonaccruing loans 41,908 22,922 30,054 36,436 22,876
Other real estate owned (OREO) 3,061 2,605 2,668 2,503 3,591
Restructured loans (2)(7) 15,539 14,281 14,953 20,061 14,336
Total nonperforming assets (NPAs)
$ 47,675 $ 59,000 $ 40,803 Past due loans: Commercial$ 5,634 $ 2,968 $ 71 $ - $ - Residential 25 437 660 356 153 Consumer (3) 11,035 12,745 104 105 285 Total past due loans$ 16,694 $ 16,150 $ 835 $ 461 $ 438 Ratio of allowance for credit losses to total gross loans and leases(4) 2.51 % 0.56 % 0.81 % 0.84 % 0.89 % Ratio of nonaccruing loans to total gross loans and leases (5) 0.46 0.27 0.62 0.76 0.51 Ratio of nonperforming assets to total assets 0.42 0.32 0.66 0.84 0.60 Ratio of allowance for credit losses to nonaccruing loans 546 208 132 111 174 Ratio of allowance for credit losses to total nonperforming assets(6) 378 120 83 69 97 (1)Includes the impact of our adoption of CECL onJanuary 1, 2020 . (2)Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans. (3)Includes delinquent, but still accruing,U.S. government guaranteed student loans with little risk of credit loss (4)Represents amortized cost basis for loans, leases and held-to-maturity securities. (5)Total loans exclude loans held for sale and reverse mortgages. (6)Excludes acquired impaired loans. (7)Balance excludes COVID-19 modifications. Nonperforming assets increased$20.7 million betweenDecember 31, 2019 andDecember 31, 2020 . Non-performing loans increased$19.0 million , primarily due to the move to non-accrual of one large CRE investor loan for$15.1 million , which occurred in the fourth quarter of 2020. Restructured loans atDecember 31, 2020 slightly increased by$1.3 million compared toDecember 31, 2019 . The ratio of nonperforming assets to total assets increased from 0.32% atDecember 31, 2019 to 0.42% atDecember 31, 2020 . 54
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Table of Contents The following table provides an analysis of the change in the balance of nonperforming assets during the last two years:
Year Ended December 31,
(Dollars in thousands) 2020 2019
Beginning balance $ 39,808 $ 47,675
Additions 45,929 57,427
Collections (16,192) (37,554)
Transfers to accrual (134) (7,786)
Charge-offs (8,903) (19,954)
Ending balance $ 60,508 $ 39,808
The timely identification of problem loans is a key element in our strategy to
manage our loan portfolio. Timely identification enables us to take appropriate
action and, accordingly, minimize losses. An asset review system established to
monitor the asset quality of our loans and investments in real estate portfolios
facilitates the identification of problem assets. In general, this system
utilizes guidelines established by federal regulation.
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 2020, we put significant effort into evaluating the needs of
our Customers and offering targeted relief through loan modifications. Our
modified loans, most of which were short-term in duration, decreased
significantly from the amounts reported for the second quarter of 2020.
The following table summarizes the COVID-19 related loan modifications by
portfolio segment as of December 31, 2020 , September 30, 2020 , and June 30,
2020 :
December 31, 2020 September 30, 2020 June 30, 2020
(Dollars in thousands) Loan Balances % of Portfolio Loan Balances % of Portfolio Loan Balances % of Portfolio
Commercial and industrial(1) $ 49,038 2 % $ 139,856 7 % $ 675,724 30 %
Owner-occupied commercial - - % 10,643 1 % 380,432 28 %
Commercial mortgages 16,008 1 % 53,122 2 % 700,889 32 %
Construction 8,740 1 % 1,748 - % 109,861 17 %
Residential 13,717 2 % 34,985 4 % 86,581 9 %
Consumer(2)(3) 27,291 2 % 42,406 4 % 65,162 7 %
$ 114,794 1 % $ 282,760 3 % $ 2,018,649 24 %
(1)Includes modifications of leases with balances of $0.2 million , $0.2 million ,
and $39.3 million at December 31, 2020 , September 30, 2020 , and June 30, 2020 ,
respectively.
(2)Includes modifications of education loans with balances of $17.1 million ,
$27.7 million , and $29.3 million at December 31, 2020 , September 30, 2020 , and
June 30, 2020 , respectively.
(3)Includes modifications of credit card loans with balances of $0.1 million ,
$0.1 million , and $0.3 million at December 31, 2020 , September 30, 2020 , and
June 30, 2020 , respectively.
55--------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS 2019 compared with 2018 For a discussion of our results for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onMarch 2, 2020 . 2020 compared with 2019 We recorded net income attributable to WSFS of$114.8 million , or$2.27 per diluted common share, for the year endedDecember 31, 2020 , a decrease of$34.0 million compared to$148.8 million , or$3.00 per diluted common share, for the year endedDecember 31, 2019 . •Net interest income for the year endedDecember 31, 2020 was$466.0 million , an increase of$21.0 million compared to 2019, primarily due to decreases in rates on deposits, the impact of PPP loans, and lower interest on borrowings. See "Net Interest Income" for further information. •Our provision for credit losses increased$127.6 million in 2020, primarily due to the COVID-19 pandemic and its impact on the economic forecast used in our CECL modeling. See "Provision/Allowance for Credit Losses" for further information. •Noninterest income increased$12.9 million in 2020, primarily due to growth across most of our business lines with the full impact of the Beneficial acquisition during the year endedDecember 31, 2020 as well as an increase in the sale of MBS compared to the prior period. Partially offsetting these increases were lower interchange fees (as a result of the Durbin Amendment impacting us beginningJuly 2020 ), the net change in realized and unrealized gains from Visa Class B shares and lower deposit service charges. See "Noninterest Income" for further information. •Noninterest expense decreased$44.3 million in 2020, primarily reflecting a decrease in net corporate development and restructuring costs related to our acquisition of Beneficial in 2019, partially offset by higher expenses related to overall growth of the Company, such as employee-related costs and professional fees, as well as increased credit-related costs (including loan workout expenses, OREO expenses and other credit costs), additional contributions to theWSFS Community Foundation and the loss on early extinguishment of debt. See "Noninterest Expense" for further information. 56 -------------------------------------------------------------------------------- Table of Contents Net Interest Income The following table provides information regarding the average balances of, and yields/rates on, interest-earning assets and interest-bearing liabilities during the periods indicated: Year Ended December 31, 2020 2019 Average Interest & Yield/ Average Interest &
Yield/
(Dollars in thousands) Balance Dividends Rate (1) Balance Dividends Rate (1) Assets: Interest-earning assets: Loans: (2) Commercial loans and leases$ 4,174,451 $ 221,595 5.32 %$ 3,383,440 $ 202,660 6.00 % Commercial real estate loans 2,827,875 125,811 4.45 2,597,508 147,486 5.68 Residential mortgage 910,263 53,780 5.91 934,250 51,882 5.55 Consumer 1,144,435 55,304 4.83 1,062,641 59,243 5.58 Loans held for sale 106,398 3,904 3.67 44,620 1,949 4.37 Total loans and leases 9,163,422 460,394 5.03 8,022,459 463,220 5.78 Mortgage-backed securities (3) 2,052,672 48,377 2.36 1,715,826 48,954 2.85 Investment securities (3) 219,603 4,619 2.47 142,295 4,015 3.37 Other interest-earning assets 369,229 1,015 0.27 176,494 4,903
2.78
Total interest-earning assets 11,804,926 514,405 4.37 10,057,074 521,092 5.19 Allowance for credit losses (177,052) (45,288) Cash and due from banks 119,337 111,723 Cash in non-owned ATMs 347,925 365,575 Bank owned life insurance 30,729 38,164 Other noninterest-earning assets 1,022,452 950,608 Total assets$ 13,148,317 $ 11,477,856 Liabilities and stockholders' equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand$ 2,304,558 $ 4,229 0.18 %$ 1,903,208 $ 8,794 0.46 % Money market 2,324,259 9,423 0.41 1,890,042 18,169 0.96 Savings 1,690,240 3,518 0.21 1,437,293 7,053 0.49 Customer time deposits 1,247,197 18,699 1.50 1,290,813 19,642
1.52
Total interest-bearing customer deposits 7,566,254 35,869 0.47 6,521,356 53,658 0.82 Brokered deposits 246,644 3,393 1.38 266,298 6,417 2.41 Total interest-bearing deposits 7,812,898 39,262 0.50 6,787,654 60,075
0.89
Federal Home Loan Bank advances 88,011 1,950 2.22 226,728 5,520 2.43 Trust preferred borrowings 67,011 1,751 2.61 67,011 2,772 4.14 Senior debt 108,420 4,998 4.61 98,492 4,717 4.79 Other borrowed funds (4) 53,828 489 0.91 165,506 3,060 1.85 Total interest-bearing liabilities 8,130,168 48,450 0.60 7,345,391 76,144
1.04
Noninterest-bearing demand deposits 2,848,243 2,156,046 Other noninterest-bearing liabilities 335,456 305,838 Stockholders' equity of WSFS 1,836,115 1,670,869 Noncontrolling interest (1,665) (288) Total liabilities and stockholders' equity$ 13,148,317 $ 11,477,856 Excess of interest-earning assets over interest-bearing liabilities$ 3,674,758 $ 2,711,683 Net interest and dividend income$ 465,955 $ 444,948 Interest rate spread 3.77 % 4.15 % Net interest margin 3.96 % 4.44 % See "Notes" (1)Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis. (2)Average balances are net of unearned income and include nonperforming loans. (3)Includes securities held-to-maturity (at amortized cost) and securities available-for-sale (at fair value). (4)Includes federal funds purchased. 57 -------------------------------------------------------------------------------- Table of Contents Net interest income increased$21.0 million , or 5%, to$466.0 million in 2020, from 2019 primarily due to$29.5 million from lower funding costs primarily due to deposit repricing,$21.7 million increase in PPP income and$4.0 million in higher purchase accounting accretion, primarily offset by a$31.2 million decrease due to the lower rate environment and$3.0 million from a decline in excess liquidity. Net interest margin decreased 48 bps to 3.96% in 2020 from 4.44% in 2019. The decrease was primarily due to a 69 bps net decline from the lower interest rate environment and balance sheet mix, 9 bps decline in excess liquidity and 3 bps from PPP, partially offset by a 33 bps increase resulting from lower funding costs. The following table provides certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change (the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume. Year Ended December 31, 2020 vs. 2019 (Dollars in thousands) Volume Yield/Rate Net Interest Income: Loans: Commercial loans and leases(1)$ 43,744 $ (24,809) $ 18,935 Commercial real estate loans 12,268 (33,943) (21,675) Residential mortgage (1,369) 3,267 1,898 Consumer 4,370 (8,309) (3,939) Loans held for sale 2,312 (357) 1,955 Mortgage-backed securities 8,657 (9,234) (577) Investment securities(2) 2,122 (1,518) 604 Other interest-earning assets 2,722 (6,610) (3,888) Favorable (unfavorable) 74,826 (81,513) (6,687) Interest expense: Deposits: Interest-bearing demand 1,568 (6,133) (4,565) Money market 3,447 (12,193) (8,746) Savings 1,062 (4,597) (3,535) Customer time deposits (679) (264) (943) Brokered certificates of deposits (446) (2,578) (3,024) FHLB advances (3,128) (442) (3,570) Trust preferred borrowings - (1,021) (1,021) Senior debt 463 (182) 281 Other borrowed funds (1,467) (1,104) (2,571) (Favorable) unfavorable 820 (28,514) (27,694) Net change, as reported$ 74,006 $ (52,999) $ 21,007
(1)Includes a tax-equivalent income adjustment related to commercial loans. (2)Includes a tax-equivalent income adjustment related to municipal bonds.
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Provision/Allowance for Credit Losses
We maintain an allowance for credit losses at an appropriate level based on our
assessment of estimable and probable losses in the loan portfolio, which we
evaluate in accordance with applicable accounting principles, as discussed
further in "Nonperforming Assets." Our evaluation is based on a review of the
portfolio and requires significant, complex and difficult judgments.
For the year ended December 31, 2020 , we recorded a provision for credit losses
of $153.2 million , an increase of $127.6 million compared to $25.6 million in
2019. The increase was primarily due to acute deterioration in the economic
forecast used in our CECL models related to the impact of COVID-19 pandemic, and
enhanced loan reviews which resulted in risk migration that occurred during the
year in several specific portfolios, mainly in the accommodation and food
service industries.
The allowance for credit losses increased to $228.8 million at December 31, 2020
from $47.6 million at December 31, 2019 . Of this increase, $35.9 million was due
to our adoption of CECL as of January 1, 2020 and $153.2 million was due to the
additional provision for credit losses during the year ended December 31, 2020 .
The ratio of allowance for credit losses to total loans and leases was 2.51% at
December 31, 2020 and 0.56% at December 31, 2019 .
During the years ended December 31, 2020 and 2019, net charge-offs totaled $7.8
million , or 0.09% of average loans, and $17.5 million or 0.22% of average loans,
respectively.
Noninterest Income
Noninterest income increased $12.9 million , or 7%, to $201.0 million in 2020
from $188.1 million in 2019. The increase in noninterest income is primarily
comprised of the following:
•a $19.1 million increase in mortgage banking activities due to improved
secondary market conditions and increased volume from refinancings resulting
from the lower interest rate environment;
•an $8.7 million increase in securities gains, net;
•a $6.5 million increase in investment management and fiduciary revenue driven
by trust and wealth services revenue;
•a $15.4 million decrease in credit/debit card and ATM income primarily due to
less interchange fees (as a result of the Durbin Amendment impacting us
beginning July 1, 2020 ), and the impact of a lower interest rate environment;
•a $3.4 million decrease in the amount of net realized and unrealized gain on
equity investments, which includes the combination of higher unrealized gains
compared to the prior period partially offset by the gain on sale of 360,000
Visa Class B shares that occurred in the second quarter of 2020; and
•a $3.0 million decrease in deposit service charges due to lower transaction
volume in 2020 as a result of the COVID-19 pandemic.
Noninterest Expenses
Noninterest expense in 2020 decreased $44.3 million to $368.8 million from
$413.1 million in 2019. The decrease in noninterest is primarily comprised of
the following:
•a $67.0 million decrease in net corporate development and restructuring costs
as compared to the prior period related to our acquisition of Beneficial in
2019;
•an $11.8 million increase in salary-related expenses, and $7.6 million in
professional fees to support our Delivery Transformation initiative, process
improvements and overall growth of the Company;
•a $3.3 million increase in credit-related costs, driven by the increase in the
unfunded commitment reserve expense in the current period;
•a $3.0 million contribution to the WSFS Community Foundation during the first
quarter of 2020; and
•a $2.3 million loss on early extinguishment of FHLB debt, as described above.
59-------------------------------------------------------------------------------- Table of Contents Income Taxes We recorded$31.6 million of income tax expense for the year endedDecember 31, 2020 compared to$46.5 million for the year endedDecember 31, 2019 . The effective tax rates for the years endedDecember 31, 2020 and 2019 were 21.8% and 23.9%, respectively. The effective tax rate for year endedDecember 31, 2020 decreased primarily due to lower nondeductible expenses associated with the acquisition of Beneficial which occurred during 2019. Nondeductible acquisition costs of$9.1 million were recognized during the year endedDecember 31, 2019 , whereas none were incurred in the same period in 2020. In addition, we recognized$1.7 million in tax benefits during the year endedDecember 31, 2020 related to tax law changes contained in the CARES Act (see "Regulation - Coronavirus Aid, Relief, and Economic Security (CARES) Act"), related to the ability to carry back certain acquired net operating losses to prior years where the statutory tax rate was higher than the current statutory tax rate. Further and partially offsetting the favorable tax benefits above, the tax benefit related to stock-based compensation activity for the year endedDecember 31, 2020 decreased compared to the prior year. We recorded less than$0.1 million of income tax expense during the year endedDecember 31, 2020 compared to$2.0 million of income tax benefits for the same period in 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/research and development tax credits, and excess tax benefits from recognized stock compensation. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options, nondeductible acquisition costs and a provision for state income tax expense. We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly. 60 -------------------------------------------------------------------------------- Table of Contents SEGMENT INFORMATION For financial reporting purposes, our business has three reporting segments:WSFS Bank , Cash Connect®, and Wealth Management.The WSFS Bank segment provides loans and leases and other financial products to commercial and retail customers. Cash Connect® provides ATM vault cash, smart safe and other cash logistics services in theU.S through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and retail safes nationwide. The Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate and institutional clients. WSFS Bank SegmentThe WSFS Bank segment income before taxes decreased$49.3 million , or 30%, in 2020 compared to 2019 due primarily to a$124.6 million increase in the provision for credit losses due to the CECL implementation, the impact of COVID-19 on the economic forecasts used in our CECL model and loan migration that occurred during the year in several specific portfolios, as previously mentioned. These credit losses were partially offset by a decrease in external operating expenses of$37.6 million or 11%, primarily driven by cost synergies since the Beneficial acquisition, an increase in external net interest income of$19.5 million , or 4%, reflecting lower funding costs from deposit repricing, and an increase of$17.7 million , or 19%, in external noninterest income primarily due to the realized/unrealized gains on equity investments from our investments in Visa Class B shares, and growth in our mortgage business due to the lower interest rates environment and its impact on customer demand. Cash Connect® Segment The Cash Connect® segment income before taxes increased to$9.2 million in 2020 from$6.1 million in 2019. During 2020, the Cash Connect® segment focused on expanding smart safe and ATM managed services to increase fee income and margins. This focus on improving margin and moving to off balance sheet cash resulted in a full-year 2020 ROA of 1.97%, an increase of 68 bps in comparison with full-year 2019. Cash Connect® had$1.6 billion and$1.4 billion in total cash managed atDecember 31, 2020 and 2019, respectively. At year-end 2020, Cash Connect® serviced approximately 27,900 non-bank ATMs and approximately 4,500 retail smart safes nationwide compared to approximately 27,900 non-bank ATMs and approximately 3,200 smart safes at year-end 2019. Wealth Management Segment The Wealth Management segment income before taxes decreased$3.3 million in 2020 compared to 2019, impacted by the CECL implementation on its private banking business, which resulted in an increase of$3.1 million in the provision for credit losses. Wealth Management's 2019 results also included$1.7 million of net interest income from a large short-term noninterest bearing trust deposit. These decreases were partially offset higher noninterest income in 2020 attributed to institutional trust activity and AUM growth from both equity market performance and strong net client cash inflows.
Segment financial information for the years ended
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ASSET/LIABILITY MANAGEMENT
Our primary asset/liability management goal is to optimize long term net
interest income opportunities within the constraints of managing interest rate
risk, ensuring adequate liquidity and funding and maintaining a strong capital
base.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. We regularly review our interest-rate
sensitivity, and use a variety of strategies as needed to adjust that
sensitivity within acceptable tolerance ranges established by management and our
Board of Directors. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of our primary strategies to
accomplish this objective.
The matching of assets and liabilities may be analyzed using a number of methods
including by examining the extent to which such assets and liabilities are
"interest-rate sensitive" and by monitoring our interest-sensitivity gap. An
interest-sensitivity gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities
repricing within a defined period, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets repricing within a defined period. For additional information
related to interest rate sensitivity, see "Quantitative and Qualitative
Disclosures About Market Risk."
The repricing and maturities of our interest-rate sensitive assets and
interest-rate sensitive liabilities at December 31, 2020 are shown in the
following table:
Less than One to Five Over Five
(Dollars in thousands) One Year Years Years Total
Interest-rate sensitive assets:
Loans:
Commercial loans and leases (2) $ 3,567,992 $ 1,189,252 $ 313,700 $ 5,070,944
Commercial real estate loans (2) 1,199,883 729,132 172,389 2,101,404
Residential loans (1) (2) 289,303 402,416 118,915 810,634
Consumer (2) 519,059 323,756 319,580 1,162,395
Loans held for sale (2) 225,182 1,263 2,080 228,525
Investment securities, available-for-sale 1,711,746 1,208,558 681,910 3,602,214
Investment securities, held-to-maturity 19,366 84,146 8,235 111,747
Total interest-rate sensitive assets: $ 7,532,531 $ 3,938,523 $ 1,616,809 $ 13,087,863
Interest-rate sensitive liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 1,317,870 $ - $ - $ 1,317,870
Savings 1,030,818 - - 1,030,818
Money market 2,098,534 - - 2,098,534
Customer time deposits 817,282 339,368 1,352 1,158,002
FHLB advances 6,623 - - 6,623
Trust preferred borrowings 67,011 - - 67,011
Senior debt 98,823 147,794 - 246,617
Other borrowed funds 222,214 14,950 1,512 238,676
Total interest-rate sensitive liabilities:
502,112$ 2,864 $ 6,164,151 Off-balance sheet instruments: $ - $ - $ - $ - Excess (deficiency) of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap)$ 1,873,356 $ 3,436,411 $ 1,613,945 $ 6,923,712 One-year interest-rate sensitive assets/interest-rate sensitive liabilities 133.10 % One-year interest-rate sensitive gap as a percent of total assets 13.07 % (1)Includes reverse mortgage loans (2)Loan balances exclude nonaccruing loans, deferred fees and costs 62 -------------------------------------------------------------------------------- Table of Contents Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which contractually reprice within the rate period may not reprice at the same price, at the same time or with the same frequency. It is also important to consider that the table represents a specific point in time. Variations can occur as we adjust our interest sensitivity position throughout the year. To provide a more accurate position of our one-year gap, certain deposit classifications are based on the interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. For the purpose of this analysis, we estimate, based on historical trends of our deposit accounts, with the exception of certain deposits estimated at 100%, that the majority of our money market deposits are 75%, and the majority of our savings and interest-bearing demand deposits are 50% sensitive to interest rate changes. Accordingly, these interest-sensitive portions are classified in the "Less than One Year" category with the remainder in the "Over Five Years" category. Deposit rates other than time deposit rates are variable. Changes in deposit rates are generally subject to local market conditions and our discretion and are not indexed to any particular rate. OFF BALANCE SHEET ARRANGEMENTS We have no off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. For a description of certain financial instruments to which we are party and which expose us to certain credit risk not recognized in our financial statements, see Note 18 to the Consolidated Financial Statements. IMPACT OF INFLATION AND CHANGING PRICES Our Consolidated Financial Statements have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without consideration of the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the price of goods and services. CONTRACTUAL OBLIGATIONS AtDecember 31, 2020 , we had contractual obligations relating to operating leases, long-term debt, data processing and credit obligations. These obligations are summarized below. See Notes 10, 13 and 18 to the Consolidated Financial Statements for further information. 2026 and (Dollars in thousands) Total 2021 2022-2023 2024-2025 Beyond
Commitments to extend credit (1)
$ - $ - $ - FHLB advances 6,623 6,623 - - - Principal payments on long term debt (2)(3) 250,000 - - - 250,000 Interest payments on long term debt (4) 66,000 8,625 17,250 17,250 22,875 Operating lease obligations 263,140 17,013 34,069 31,839 180,219 Data processing obligations 29,918 9,262 15,792 4,864 - Total$ 2,967,311 $ 2,393,153 $ 67,111 $ 53,953 $ 453,094 (1)Includes loan commitments and commercial standby letters of credit. Does not reflect commitments to sell residential mortgages. (2)The 2016 senior notes are redeemable onJune 15, 2021 or on any interest payment date thereafter. (3)The 2020 senior notes are redeemable onDecember 15, 2025 or on any interest payment date thereafter. (4)To calculate payments due for interest, we assumed that interest rates were unchanged fromDecember 31, 2020 through maturity. 63
-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING ESTIMATES The discussion and analyses of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity withU.S. GAAP and general practices within the banking industry. The significant accounting policies of the Company are described in Note 2 to the Consolidated Financial Statements. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that may materially affect the reported amounts of assets, liabilities, revenues and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for credit losses, business combinations, deferred taxes, fair value measurements and goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The following critical accounting policies involve more significant judgments and estimates. We have reviewed these critical accounting policies and estimates with the Audit Committee. Allowance for Credit Losses We maintain an allowance for credit losses which represents our best estimate of expected losses in our financial assets, which include loans, leases and held-to-maturity debt securities. We establish our allowance in accordance with guidance provided in ASC 326, Financial Instruments - Credit Losses, as adopted onJanuary 1, 2020 . The allowance includes two primary components: (i) an allowance established on financial assets which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on financial assets which do not share similar risk characteristics with any loan segment and is individually evaluated for credit losses (individual basis). We consider the determination of the allowance for credit losses to be critical because it requires significant judgment reflecting our best estimate of expected credit losses based on our historical loss experience, current conditions and economic forecasts. Our evaluation is based upon a continuous review of our financial assets, with consideration given to evaluations resulting from examinations performed by regulatory authorities. See Note 8 to the Consolidated Financial Statements, for further discussion of the allowance for credit losses.
Recent Accounting Pronouncements For information on Recent Accounting Pronouncements see Note 2 to the Consolidated Financial Statements.
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