WSFS Financial Corp: Form 10-Q for the period ended Sep 30, 2023

OVERVIEW

WSFS Financial Corporation (WSFS, and together with its subsidiaries, the Company) is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies in the United States (U.S.) continuously operating under the same name. With $20.0 billion in assets and $77.6 billion in assets under management (AUM) and assets under administration (AUA) at September 30, 2023, WSFS Bank is the oldest and largest locally-managed bank and trust company headquartered in the Greater Philadelphia and Delaware region. As a federal savings bank that was formerly chartered as a state mutual savings bank, WSFS Bank enjoys a broader scope of permissible activities than most other financial institutions. A fixture in the community, we have been in operation for more than 191 years. In addition to our focus on stellar customer experience, we have continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution. Our mission is simple: “We Stand for Service.” Our strategy of “Engaged Associates, living our culture, enriching the communities we serve” focuses on exceeding customer expectations, delivering stellar experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.

As of September 30, 2023, we had six consolidated subsidiaries: WSFS Bank, The Bryn Mawr Trust Company of Delaware (BMT-DE), Bryn Mawr Capital Management, LLC (BMCM), WSFS Wealth Management, LLC (Powdermill®), WSFS SPE Services, LLC, and 601 Perkasie, LLC. The Company also has three unconsolidated subsidiaries: WSFS Capital Trust III, Royal Bancshares Capital Trust I, and Royal Bancshares Capital Trust II. WSFS Bank has two wholly-owned subsidiaries: Beneficial Equipment Finance Corporation (BEFC) and 1832 Holdings, Inc., and one majority-owned subsidiary, NewLane Finance Company (NewLane Finance®).

On January 1, 2023, WSFS completed the merger and brand conversion of WSFS Capital Management, LLC (West Capital) and Cypress Capital Management, LLC and renamed the combined entity Bryn Mawr Capital Management, LLC. BMCM is registered as an investment advisor with the U.S. Securities and Exchange Commission and is a wholly-owned subsidiary of WSFS.

Our banking business had a total loan and lease portfolio of $12.7 billion as of September 30, 2023, which was funded primarily through commercial relationships and consumer and customer generated deposits. We have built a $9.9 billion commercial loan and lease portfolio by recruiting seasoned commercial lenders in our markets, offering the high level of service and flexibility typically associated with a community bank and through acquisitions. We also offer a broad variety of consumer loan products and retail securities brokerage through our retail branches, in addition to mortgage and title services through our branches and WSFS Mortgage®, our mortgage banking company specializing in a variety of residential mortgage and refinancing solutions. Our leasing business, conducted by NewLane Finance®, originates small business leases and provides commercial financing to businesses nationwide, targeting various equipment categories including technology, software, office, medical, veterinary and other areas. In addition, NewLane Finance® offers captive insurance through its subsidiary, Prime Protect.

Our Cash Connect® business is a premier provider of ATM vault cash, smart safe (safes that automatically accept, validate, record and hold cash in a secure environment) and other cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and smart safes nationwide, and manages approximately $1.5 billion in total cash and services approximately 25,200 non-bank ATMs and 8,600 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 592 branded ATMs for WSFS Bank Customers, which is one of the largest branded ATM networks in our market. On September 29, 2023, Cash Connect entered into an agreement to add approximately 8,000 units to its bailment ATM count, which is expected to close in 4Q 2023.

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 $77.6 billion of AUM and AUA at September 30, 2023. Bryn Mawr Trust® is our predominant Private Wealth Management brand, providing advisory, investment management and trustee services to institutions, affluent and high-net-worth individuals. BMT-DE provides personal trust and fiduciary services to families and individuals across the U.S. and internationally. WSFS Institutional Services® provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional, corporate clients and special purpose vehicles. Private Wealth Management serves high-net-worth clients and institutions by providing trustee and advisory services, financial planning, customized investment strategies, brokerage products such as annuities and traditional banking services such as credit and deposit products tailored to its clientele. Private Wealth Management includes businesses that operate under the bank’s charter, through a broker/dealer and as a registered investment advisor (RIA). It generates revenue through a percentage fee based on account assets, fee-only arrangements, net interest income and other fee-only services such as estate administration, trust tax planning and custody. Powdermill® is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach.

As of September 30, 2023, we service our customers primarily from 116 offices located in Pennsylvania (59), Delaware (40), New Jersey (14), Florida (1) and Nevada (1) and Virginia (1), our ATM network, our website at www.wsfsbank.com (http://www.wsfsbank.com) and our mobile app.

Highlights and Other Notables Items for Three and Nine Months Ended September 30, 2023

• Three Months Ended September 30, 2023
• BMCM expanded into southern Delaware and established a new presence in Boca Raton, Florida, after an acquisition of a woman-founded, owned and managed registered investment advisory firm based in Rehoboth Beach, Delaware.
• In August 2023, Kroll Bond Rating Agency (KBRA) reaffirmed the senior unsecured debt rating of A-, subordinated debt rating of BBB+, and a short term debt rating of K2 for the Company. The Bank received A ratings for both senior unsecured debt and deposit, a subordinated debt rating of A-, and the short-term debt and deposit ratings of K1.
• WSFS repurchased 386,900 shares of common stock under the Company's share repurchase programs at an average price of $40.67 per share, for an aggregate purchase price of approximately $15.7 million.
• The Board of Directors approved a $0.15 per share quarterly cash dividend.
• The Bank and the Company continue to be well above well-capitalized across all measures of regulatory capital, with total common equity tier 1 capital of 13.26% and 12.75%, respectively, and total risk-based capital of 14.43% and 14.82%, respectively.
• Nine Months Ended September 30, 2023
• Net loans and leases grew $742.4 million, or 8% annualized, compared to December 31, 2022.
• The allowance for credit losses (ACL) on loans and leases increased $24.1 million when compared to December 31, 2022, primarily due to impact from the economic forecast and net loan originations.
• During the nine months ended September 30, 2023, WSFS had capital returns of $69.9 million to stockholders, comprised of $42.3 million from share repurchases and $27.6 million from quarterly dividends.
• WSFS completed the redemption of the $30.0 million of fixed-to-floating rate subordinated notes due 2025 (the 2025 Notes) acquired from Bryn Mawr Trust. The 2025 Notes were redeemed at a price of 100%, plus accrued and unpaid interest through the date of redemption.
• In April 2023, Moody's Investors Service (Moody’s) lowered the macro profile for the U.S. banking system to ‘Strong +’ from ‘Very Strong.’ Lowering the macro profile resulted in updates to 22 bank ratings. As part of this update, Moody’s reaffirmed both the Company and Bank ratings with a stable outlook from positive.
• During the year, we held our first-ever "We Stand for Service Day", during which approximately 1,200 of our Associates provided nearly 5,000 hours of service to more than 80 nonprofit and community organizations across the Greater Philadelphia, Southern New Jersey and Delaware region.

FINANCIAL CONDITION

Total assets increased $126.2 million to $20.0 billion at September 30, 2023 compared to December 31, 2022. This increase is primarily comprised of the following:

• Net loans and leases held for investment increased $742.4 million primarily due to increases of $294.6 million in commercial mortgages, $146.2 million in consumer loans primarily from our consumer partnerships, $114.6 million in owner-occupied commercial loans, and $96.2 million in residential loans.
• Other assets increased $84.4 million, primarily due to a $40.4 million increase due to fair value changes of derivatives from our capital markets business and a $32.2 million increase on our deferred tax asset related to unrealized losses on available-for-sale securities.
• Total investment securities decreased $444.3 million:
• Investment securities, available-for-sale decreased $401.5 million primarily due to repayments, maturities and calls of $269.2 million and decreased market values of $151.2 million, partially offset by purchases of $21.1 million.
• Investment securities, held-to-maturity decreased $42.7 million, primarily due to repayments, maturities and calls of $57.8 million, partially offset by $17.0 million of amortization of net unrealized losses on available-for-sale securities transferred to held-to-maturity.
• Total cash and cash equivalents decreased $225.8 million, primarily due to decreases in customer deposits, increased lending activity, and the redemption of the 2025 Notes, partially offset by an increase in other borrowed funds.
• Stock in FHLB decreased $11.9 million due to a decrease in the borrowing activity.

Total liabilities increased $92.7 million to $17.8 billion at September 30, 2023 compared to December 31, 2022. This increase is primarily comprised of the following:

• Other borrowed funds increased $545.6 million primarily due to $565.0 million borrowed from the Bank Term Funding Program (BTFP) as a result of favorable terms and pricing.
• Other liabilities increased $81.7 million, primarily due to a $72.9 million increase in capital markets derivative collateral, and a $40.3 million increase in the fair value of derivatives from our capital markets business, partially offset by a $12.4 million reduction in accrued expenses primarily due to compensation activity, an $11.2 million reduction in lease liabilities due to scheduled and accelerated amortization related to branch closures during the year, and a $7.9 million decrease in accrued taxes.
• FHLB advances decreased $350.0 million due to the repayment of fixed rate FHLB term advances as part of our routine balance sheet management.
• Customer deposits decreased $183.7 million primarily due to decreases in our small business and commercial lines of business, partially offset by wealth and consumer deposits.

For further information, see "Notes to the Consolidated Financial Statements (Unaudited)."

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

Stockholders’ equity of WSFS increased $37.7 million between December 31, 2022 and September 30, 2023. This increase was primarily due to $205.2 million of earnings, partially offset by an increase of $104.9 million in accumulated other comprehensive loss driven by market value decreases on available-for-sale mortgage-backed securities, $42.3 million from the repurchase of shares of common stock under our stock repurchase plan, and the payment of dividends on our common stock of $27.6 million.

During the three months ended September 30, 2023, our Board of Directors approved a quarterly cash dividend of $0.15 per share of common stock. This dividend will be paid on November 17, 2023 to stockholders of record as of November 3, 2023.

Book value per share of common stock was $36.93 at September 30, 2023, an increase of $1.14 from $35.79 at December 31, 2022. Tangible book value per share of common stock (a non-GAAP financial measure) was $20.33 at September 30, 2023, an increase of $0.97 from $19.36 at December 31, 2022. We believe tangible book value per common share helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP measure should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a substitute for, or superior to, GAAP results. For a reconciliation of tangible book value per common share to book value per share in accordance with GAAP, see "Reconciliation of Non-GAAP Measure to GAAP Measure."

The table below compares the Bank's and the Company’s consolidated capital position to the minimum regulatory requirements as of September 30, 2023:

(Dollars in thousands)

Under the prompt corrective action regime, regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends on its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions, which may include restrictions on capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

Regulatory capital requirements for the Bank and the Company include a minimum common equity Tier 1 capital ratio of 4.50% of risk-weighted assets, a Tier 1 capital ratio of 6.00% of risk-weighted assets, a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets. 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. As of September 30, 2023, the Bank and the Company were in compliance with the regulatory capital requirements and met or exceeded the amounts required to be considered “well-capitalized” as defined in the regulations.

Not included in the Bank’s capital, WSFS separately held $201.3 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.

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Liquidity

We manage our liquidity and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.

Funding sources to support growth and meet our liquidity needs include cash from operations, commercial, consumer, wealth and trust deposits, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to meet our funding needs as well as maintain required and prudent levels of liquidity over the next twelve months and beyond.

As of September 30, 2023, the Company had $0.6 billion in cash, cash equivalents, and restricted cash. As of September 30, 2023, our estimated uninsured deposits were $5.8 billion, or 37% of total customer deposits, and our estimated unprotected deposits (uninsured and uncollateralized) were $4.4 billion, or 28% of total customer deposits.

As of September 30, 2023, the Company had a readily available, secured borrowing capacity of $5.3 billion from the FHLB, $0.7 billion through the Federal Reserve Discount Window, and $1.0 billion through the BTFP. In addition, the Company had $1.3 billion in unpledged securities that could be used to support additional borrowings and $0.1 billion of cash deposited with the Federal Reserve Bank. The Company’s readily available, secured borrowing capacity to estimated unprotected deposits ratio is 188%.

Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At September 30, 2023, we had $205.2 million in total contractual payments for ongoing leases that have remaining lease terms of less than one year to 22 years, which includes renewal options that are exercised at our discretion. For additional information on our operating leases see Note 8 to the unaudited Consolidated Financial Statements. At September 30, 2023, we had obligations for principal payments on long-term debt including $67.0 million for our trust preferred borrowings, due June 1, 2035, $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027, and $150.0 million for our senior debt, due December 15, 2030. Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the Trusts), which were acquired from Bryn Mawr Bank Corporation, were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although WSFS owns an aggregate of $0.8 million of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Company’s Consolidated Financial Statements. Inclusive of the fair value marks, WSFS assumed junior subordinated debentures owed to the Trusts with a carrying value of $11.8 million each, totaling $23.6 million. The Company records its investments in the Trusts’ common securities of $0.4 million each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities. We are also contractually obligated to make interest payments on our long-term debt through their respective maturities.

Commitments to extend credit provide for financing on predetermined terms as long as the customer continues to meet specific criteria. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2023, the Company had total commitments to extend credit of $4.0 billion, which are generally one year commitments.

NONPERFORMING ASSETS

Nonperforming assets include nonaccruing loans, OREO and restructured loans. Nonaccruing loans are those on which we no longer accrue interest. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.

The following table shows our nonperforming assets and past due loans at the dates indicated:

(Dollars in thousands)

(1) Includes nonaccruing troubled loans beginning in 2023 and nonaccruing troubled debt restructurings (TDRs) prior to 2023.

(2) Balance excludes COVID-19 modifications.

(3) Includes 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 PCD loans.

Nonperforming assets increased $14.4 million between December 31, 2022 and September 30, 2023. This increase was primarily due to the addition of six commercial relationships, partially offset by the adoption of ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ratio of nonperforming assets to total assets decreased from 0.22% at December 31, 2022 to 0.29% at September 30, 2023.

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

(Dollars in thousands)

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

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Problem loans are all criticized, classified and nonperforming loans and other real estate owned. Timely identification enables us to take appropriate action and accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system uses guidelines established by federal regulation.

INTEREST RATE SENSITIVITY

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while maximizing the yield/cost spread on our asset/liability structure. Interest rates are partly a function of decisions by the Federal Open Market Committee (FOMC) on the target range for the federal funds rate, and these decisions are sometimes difficult to anticipate. In response to the economic and financial effects of COVID-19, the FOMC reduced interest rates through 2020 and 2021 and instituted quantitative easing measures as well as domestic and global capital market support programs. The FOMC raised the federal funds target rate seven times in 2022 for a total of 425 basis points and four times in 2023 for a total of 100 basis points, and has suggested it may continue raising interest rates further in 2023. In order to manage the risks associated with changes or possible changes in interest rates, we rely primarily on our asset/liability structure.

Our primary tool for achieving our asset/liability management strategies is to match maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At September 30, 2023, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $81.2 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 100.96% at September 30, 2023 compared with 116.93% at December 31, 2022. Likewise, the one-year interest-sensitive gap as a percentage of total assets was 0.41% at September 30, 2023 compared with 6.29% at December 31, 2022.

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure evaluates the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.

The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at September 30, 2023 and December 31, 2022:

(1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.

(2) The economic value of equity ratio in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.

We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.

RESULTS OF OPERATIONS

Three months ended September 30, 2023: Net income for the three months ended September 30, 2023 was $74.2 million, compared to $73.4 million for the three months ended September 30, 2022.

• Net interest income increased $5.8 million primarily due to the rising interest rate environment and balance sheet size and mix. See “Net Interest Income” for further information.
• Our provision for credit losses increased $11.0 million primarily due to net loan growth and downgrades, partially offset by the impact of the economic forecast. See “Allowance for Credit Losses” for further information.
• Noninterest income increased $10.0 million primarily due to increases in income from Cash Connect®, Wealth Management fee income, and capital markets income. These increases were partially offset by decreases in other banking fees. See “Noninterest Income” for further information.
• Noninterest expense increased $6.8 million primarily due to higher variable operating costs from Cash Connect®, salaries and benefits costs, and professional fees, partially offset by a decrease in net corporate development and restructuring costs.
• Income tax provision decreased $2.9 million primarily due to the $1.9 million decrease in pre-tax income and higher projected tax benefits from our lower income housing tax credit investments, partially offset by the impacts of non-deductible goodwill written off during the sale of the BMTIA business.

Nine months ended September 30, 2023: Net income for the nine months ended September 30, 2023 was $205.2 million, compared to $137.9 million for the nine months ended September 30, 2022.

• Net interest income increased $78.0 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to the reasons described above. See “Net Interest Income” for further information.
• Our provision for credit losses for the nine months ended September 30, 2023 increased $28.6 million compared to the nine months ended September 30, 2022, due to the impacts of the economic uncertainty and forecast. See “Allowance for Credit Losses” for further information.
• Noninterest income for the nine months ended September 30, 2023 increased $7.4 million compared to the nine months ended September 30, 2022, primarily due to increases in income from Cash Connect®, Wealth Management fee income, and capital markets income. These increases were partially offset by decreases in other banking fees and mortgage banking activities, and unrealized gains on equity investments and income from BMTIA (business sold in 2022). See “Noninterest Income” for further information.
• Noninterest expense decreased $27.4 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to a decrease in net corporate development and restructuring costs, partially offset by increases in other operating expense driven by Cash Connect®, salaries and benefits costs, and professional fees. See “Noninterest Expense” for further information.
• Income tax provision for the nine months ended September 30, 2023 increased $17.0 million compared to the nine months ended September 30, 2022, primarily due to the $84.3 million increase in pre-tax income.

Net Interest Income

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:

(Dollars in thousands)

(1) Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.

(2) Average balances are net of unearned income and include nonperforming loans.

(3) Includes securities available-for-sale at fair value.

(4) Includes federal funds purchased.

(Dollars in thousands)

(1) Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.

(2) Average balances are net of unearned income and include nonperforming loans.

(3) Includes securities available-for-sale at fair value.

(4) Includes federal funds purchased.

Three months ended September 30, 2023: During the three months ended September 30, 2023, net interest income increased $5.8 million from the three months ended September 30, 2022 primarily due to the rising interest rate environment and balance sheet size and mix. Net interest margin was 4.08% for the third quarter of 2023, a 9 basis point increase compared to 3.99% for the third quarter of 2022 due to a favorable increase of 14 basis points from loan growth and mix, partially offset by a decrease of 4 basis points due to increasing deposit betas and 1 basis point from purchase accounting accretion.

Nine months ended September 30, 2023: During the nine months ended September 30, 2023, net interest income increased $78.0 million from the nine months ended September 30, 2022. This increase included $79.9 million from balance sheet size and mix and the benefits of our asset sensitive balance sheet, partially offset by a $1.9 million decrease in purchase accounting accretion. Net interest margin was 4.15% for the nine months ended September 30, 2023, a 69 basis point increase compared to 3.46% for the nine months ended September 30, 2022 reflecting a 40 basis point increase due to our asset-sensitive balance sheet and a 30 basis point increase due to loan growth and mix, partially offset by 1 basis point from purchase accounting accretion.

Allowance for Credit Losses

We maintain the allowance for credit losses at an appropriate level based on our assessment of estimable and expected losses in the loan portfolio. Our allowance for credit losses is based on our historical loss experience that includes the inherent risk of our loans and various other factors including but not limited to, collateral values, trends in asset quality, level of delinquent loans and concentrations. Further, regional and national economic forecasts are considered in our expected credit losses. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments.

During the three months ended September 30, 2023, we recorded a provision for credit losses of $18.4 million, a net change of $11.0 million, as compared with the provision for credit losses of $7.5 million for the three months ended September 30, 2022. This increase was primarily due to net loan growth and downgrades, partially offset by the impact of the economic forecast.

During the nine months ended September 30, 2023, we recorded a provision for credit losses of $63.3 million, a net change of $28.6 million, as compared with the provision for credit losses of $34.7 million for the nine months ended September 30, 2022. This increase was primarily due to the impact of the economic uncertainty and forecast.

The allowance for credit losses increased to $176.0 million at September 30, 2023 from $151.9 million at December 31, 2022. The ratio of allowance for credit losses to total loans and leases was 1.28% at September 30, 2023 and 1.17% at December 31, 2022.

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

(Dollars in thousands)

(1) Includes commercial small business leases.

(2) Excludes reverse mortgages.

(3) Includes home equity lines of credit, installment loans unsecured lines of credit and education loans.

(Dollars in thousands)

(1) Includes commercial small business leases.

(2) Excludes reverse mortgages.

(3) Includes home equity lines of credit, installment loans unsecured lines of credit and education loans.

See Note 7 to the unaudited Consolidated Financial Statements and "Nonperforming Assets" above for further information.

Noninterest Income

Three months ended September 30, 2023: During the three months ended September 30, 2023, noninterest income was $72.7 million, an increase of $10.0 million from $62.7 million during the three months ended September 30, 2022. The increase was primarily driven by $5.8 million from Cash Connect®, $3.8 million in Wealth Management fees, and $2.8 million in capital markets income. Partially offsetting these increases was a $3.7 million decrease in other banking fees from lower returns on derivative collateral as a result of funding optimization and lower income from our consumer lending partnerships.

Nine months ended September 30, 2023: During the nine months ended September 30, 2023, noninterest income was $202.7 million, an increase of $7.4 million from $195.3 million during the nine months ended September 30, 2022. This increase was primarily driven by $21.9 million from Cash Connect®, $2.6 million in Wealth Management fees, and $2.4 million in capital markets income. These increases were partially offset by an $11.1 million decrease in other banking fees and a $2.8 million decrease in mortgage banking activities. In addition to these decreases, we recognized $6.0 million of unrealized gains on equity investments and $2.6 million from BMTIA in 2022.

For further information, see Note 3 to the unaudited Consolidated Financial Statements.

Noninterest Expense

Three months ended September 30, 2023: During the three months ended September 30, 2023, noninterest expense was $139.7 million, an increase of $6.8 million from $132.9 million for the three months ended September 30, 2022. The increase was primarily due to $6.3 million in other operating expense driven by higher variable operating costs from Cash Connect®, $2.2 million from salaries and benefits costs, and $1.1 million from professional fees. These increases were partially offset by a $2.5 million decrease in net corporate development and restructuring costs.

Nine months ended September 30, 2023: During the nine months ended September 30, 2023, noninterest expense was $414.0 million, a decrease of $27.4 million from $441.4 million for the nine months ended September 30, 2022. The decrease was primarily due to a $61.6 million decrease in net corporate development and restructuring costs, partially offset by increases of $20.8 million in other operating expense driven by higher variable operating costs from Cash Connect®, $8.3 million in salaries and benefits costs, and $2.9 million in professional fees.

Income Taxes

We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, Income Taxes, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded income tax expense of $22.9 million and $66.9 million during the three and nine months ended September 30, 2023, respectively, compared to income tax expense of $25.8 million and $49.9 million for the same periods in 2022, respectively.

Our effective tax rate was 23.6% and 24.6% for the three and nine months ended September 30, 2023, respectively, compared to 26.0% and 26.5% for the same periods in 2022, respectively. The effective tax rate for the three and nine months ended September 30, 2023 decreased primarily due to an increase in projected tax benefits from our low-income housing tax credit investments as well as a reduction in state income taxes. In addition, we incurred $0.4 million of tax expense related to nondeductible merger costs incurred in the nine months ended September 30, 2022 combined with $1.9 million of tax expense related to nondeductible goodwill written off during the sale of the BMTIA business that occurred in that same period.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, 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 (incurred in 2022) 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.

RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE

The following table provides a reconciliation of tangible book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.

(Dollars and share amounts in thousands, except per share amounts)

CRITICAL ACCOUNTING ESTIMATES

The preparation of the unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those 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. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2023, it is possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates at September 30, 2023 did not significantly change from our critical accounting estimates at December 31, 2022, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

RECENT REGULATORY DEVELOPMENTS

Recent regulatory developments at September 30, 2023 did not significantly change from our recent regulatory developments at December 31, 2022, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as noted below.

Potential Regulatory Reforms in Response to Recent Bank Failures

The recent failures of Silicon Valley Bank, Santa Clara, California, Signature Bank, New York, New York, and First Republic Bank, San Francisco, California, in March and April of this year, have led, and may continue to lead, to regulatory changes and initiatives that could impact the Company. For example, the FDIC has stated that it plans to impose a special deposit insurance assessment on banks in order to recover losses that the FDIC's Deposit Insurance Fund (DIF) incurred in the receiverships of these institutions. In addition, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures. Further, on April 28, 2023, the Federal Reserve and the FDIC issued reports on the potential causes of failures of Silicon Valley Bank and Signature Bank, respectively. Among the changes discussed, the Federal Reserve and the FDIC highlighted the need to change their approach to supervising banks of all sizes as well as to their capital and other regulatory requirements. Despite these initiatives, it remains unclear what actions federal regulatory agencies will ultimately take as a result of these failures.

FDIC Special Assessment

On May 11, 2023, the FDIC published a proposed rule that would impose a special deposit insurance assessment on insured depository institutions in order to recover losses that the FDIC's Deposit Insurance Fund (DIF) has incurred in the receiverships of Silicon Valley Bank and Signature Bank. The proposed rule would require the payment of the special assessment over eight quarterly assessment periods beginning the first quarter of 2024, subject to adjustments if the total amount collected is insufficient to cover the DIF’s costs. Each quarterly special assessment would be equal to 3.13 basis points (0.0313%) of the amount of an institution’s estimated uninsured deposits that exceeded $5 billion as of December 31, 2022. As of December 31, 2022, WSFS Bank’s estimated amount of uninsured deposits was $6.9 billion.

Small Business Lending Data Collection Rule

On March 30, 2023, the CFPB finalized a rule under section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity. The rule was scheduled to take effect on August 29, 2023, and requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates. On July 31, 2023, the U.S. District Court for the Southern District of Texas ordered the CFPB not to implement or enforce the rule against the plaintiff trade associations in Texas Bankers Ass'n, et al, v. CFPB, et al, No. 7:23-cv-00144, and their members, which include WSFS Bank. The Company is evaluating the impact of the new rule and related court rulings.

Transition from London Inter-Bank Offered Rate (LIBOR)

LIBOR, a benchmark interest rate that was widely referenced in the past, is no longer published as of June 30, 2023. Financial market regulators had taken steps in previous years to prepare for the transition away from LIBOR and to encourage banks and other market participants to do the same. The United Kingdom Financial Conduct Authority (FCA) caused several LIBOR settings to cease publication after December 31, 2021 and the remaining settings to cease publication after June 30, 2023.

The Adjustable Interest Rate (LIBOR) Act and implementing regulations of the Federal Reserve created a set of default rules for preexisting contracts that reference LIBOR, and created a safe harbor from liability for persons who elected to use the Secured Overnight Financing Rate (SOFR) as the replacement rate in a contract that references LIBOR.

The Company’s commercial and consumer businesses used various products that were indexed to LIBOR. Most of these instruments gave the Company discretion to determine a replacement benchmark rate when LIBOR became unavailable.

This discretion combined with the LIBOR Act's safe harbor allowed the Company to select and migrate to SOFR as a replacement to LIBOR in the first quarter of 2022. Currently, the Company's new variable rate loan products are primarily originated in SOFR.

Third-Party Risk Management Guidance

On June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management. The Company is evaluating the impact of this guidance on its practices.

The information required by this Item is incorporated herein by reference to the information provided in Part I Item 2 (Interest Rate Sensitivity) of this Quarterly Report on Form-10-Q.

(a) Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2023.

There have not been any material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.