WSFS Financial Corp: Form 10-Q for the period ended Jun 30, 2024

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 $20.7 billion in assets and $84.9 billion in assets under management (AUM) and assets under administration (AUA) at June 30, 2024, 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 192 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 June 30, 2024, 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®).

Our banking business had a total loan and lease portfolio of $13.1 billion as of June 30, 2024, which was funded primarily through commercial relationships and consumer and customer generated deposits. We have built a $10.1 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 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 $1.7 billion in total cash and services approximately 33,100 non-bank ATMs and 9,400 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 579 owned or branded ATMs for WSFS Bank Customers, which is one of the largest branded ATM networks in our market.

Our Wealth Management business provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate and institutional clients. Combined, these businesses had $84.9 billion of AUM and AUA at June 30, 2024.

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. 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.

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.

As of June 30, 2024, we service our customers primarily from 114 offices located in Pennsylvania (57), Delaware (39), New Jersey (14), Florida (2) 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 Six Months Ended June 30, 2024

• Three Months Ended June 30, 2024
• Noninterest income was $91.6 million, or 34.38% of total net revenue, and included:
• As a result of the Visa Class B exchange program, (i) a $3.4 million gain resulting from the reduction of our Visa B derivative liability established from our previous sale of 360,000 shares in 2Q 2020 and (ii) a $0.1 million gain on the liquidation of a portion of our remaining equity investment.
• Post-close distributions of $2.0 million related to the sale of our equity interests in Spring EQ that occurred in the fourth quarter of 2023.
• WSFS repurchased 897,461 shares of common stock under the Company's share repurchase programs at an average price of $44.20 per share, for an aggregate purchase price of approximately $39.7 million.
• The Board of Directors approved a $0.15 per share quarterly cash dividend.
• During the quarter, we held our second annual "We Stand for Service Day", during which nearly 1,500 of our Associates volunteered at more than 130 community organizations across the Greater Philadelphia, Southern New Jersey and Delaware region.
• In July 2024, Moody's Investor Services reaffirmed the Company's investment-grade issuer rating of Baa2 with a stable outlook. The ratings reaffirmation reflects the benefits of our diversified business model, our strong capital levels, earnings, liquidity, and asset quality.
• 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 13.07% and 13.29%, respectively, and total risk-based capital of 14.32% and 15.34%, respectively.
• Six Months Ended June 30, 2024
• Net loans and leases grew $362.7 million, or 6% annualized, compared to December 31, 2023.
• The allowance for credit losses (ACL) on loans and leases increased $12.1 million when compared to December 31, 2023, primarily due to higher provision on our commercial mortgages portfolio.
• During the six months ended June 30, 2024, WSFS had capital returns of $78.7 million to stockholders, comprised of $60.7 million from share repurchases and $18.1 million from quarterly dividends.
• WSFS recorded a $0.9 million expense for the final FDIC Special Assessment received during the year.

FINANCIAL CONDITION

Total assets increased $149.9 million to $20.7 billion at June 30, 2024 compared to December 31, 2023. This increase is primarily comprised of the following:

• Net loans and leases held for investment increased $362.7 million, primarily due to increases of $99.1 million in commercial and industrial and $94.3 million in consumer loans primarily from Spring EQ home equity loans. Commercial mortgages increased $233.6 million with a corresponding decrease of $156.3 million in construction due to the migration of construction loans to permanent commercial mortgages. Additionally, owner-occupied commercial loans increased $54.6 million and residential mortgage loans increased $29.7 million.
• Other assets increased $59.5 million, primarily due to increases of $23.7 million in derivatives from our capital markets business due to changes in fair value, $13.1 million in our deferred tax asset primarily related to unrealized losses on available-for-sale securities, and $8.4 million in lease right of use asset due to additional leases entered into in 2024.
• Total investment securities decreased $214.3 million:
• Investment securities, available-for-sale decreased $194.6 million, primarily due to repayments, maturities and calls of $169.5 million and decreased market values of $64.6 million, partially offset by purchases of $41.1 million.
• Investment securities, held-to-maturity decreased $19.7 million, primarily due to repayments, maturities and calls of $28.6 million, partially offset by $7.3 million of amortization of net unrealized losses on available-for-sale securities transferred to held-to-maturity.
• Total cash and cash equivalents decreased $71.2 million, primarily due to a shift to external funding sources in our Cash Connect® business.
• Goodwill and intangible assets decreased $8.4 million due to scheduled amortization of intangible assets.

Total liabilities increased $141.3 million to $18.3 billion at June 30, 2024 compared to December 31, 2023. This increase is primarily comprised of the following:

• Other borrowed funds increased $224.7 million, primarily due to $235.0 million borrowed from the Bank Term Funding Program (BTFP) as a result of favorable terms and pricing.
• Other liabilities increased $67.1 million, primarily due to increases of $70.2 million in collateral held on derivatives and derivative liabilities, partially offset by a decrease of $5.1 million due to the reduction of our Visa B derivative liability.
• Customer deposits decreased $131.3 million primarily due to transactional accounts, which drive notable inflows and outflows of deposits in our Trust and Commercial businesses, offset by growth in our Private Wealth Management and Consumer businesses.

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

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

Stockholders’ equity of WSFS increased $11.9 million between December 31, 2023 and June 30, 2024. This increase was primarily due to $135.0 million of earnings, partially offset by $60.7 million from the repurchase of shares of common stock under our stock repurchase plan, an increase of $48.9 million in accumulated other comprehensive loss driven by market value decreases on available-for-sale mortgage-backed securities, and the payment of dividends on our common stock of $18.1 million.

During the three months ended June 30, 2024, our Board of Directors approved a quarterly cash dividend of $0.15 per share of common stock. This dividend will be paid on August 23, 2024 to stockholders of record as of August 9, 2024.

Book value per share of common stock was $42.01 at June 30, 2024, an increase of $1.08 from $40.93 at December 31, 2023. Tangible book value per share of common stock (a non-GAAP financial measure) was $25.20 at June 30, 2024, an increase of $0.87 from $24.33 at December 31, 2023. 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 June 30, 2024:

(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 June 30, 2024, 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 $330.5 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 June 30, 2024, the Company had $1.0 billion in cash, cash equivalents, and restricted cash. As of June 30, 2024, our estimated uninsured deposits were $6.0 billion, or 37% of total customer deposits, and our estimated unprotected deposits (uninsured and uncollateralized) were $5.2 billion, or 32% of total customer deposits.

As of June 30, 2024, the Company had a readily available, secured borrowing capacity of $5.3 billion from the FHLB and $1.8 billion through the Federal Reserve Discount Window. In addition, the Company had $1.7 billion in unpledged securities that could be used to support additional borrowings and $0.4 billion of cash deposited with the Federal Reserve Bank.

Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At June 30, 2024, we had $224.7 million in total contractual payments for ongoing leases that have remaining lease terms of less than one year to 21 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 June 30, 2024, 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. At June 30, 2024, we had advances of $800 million under the BTFP, due January 2025. Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the RBC 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 RBC 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 RBC Trusts with a current carrying value of $11.9 million each, totaling $23.7 million. The Company records its investments in the RBC 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 RBC 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 June 30, 2024, 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.

(2) Includes nonaccrual loans held-for-sale as of December 31, 2023

(3) Includes U.S. government guaranteed student loans with little risk of credit loss.

(4) Represents amortized cost basis for loans and leases.

(5) Total loans exclude loans held for sale and reverse mortgages.

(6) Excludes acquired PCD loans.

Nonperforming assets decreased $10.4 million between December 31, 2023 and June 30, 2024. This decrease was primarily driven by favorable resolutions and paydowns of multiple loans during the year and a charge-off on a commercial mortgage relationship. The ratio of nonperforming assets to total assets decreased from 0.37% at December 31, 2023 to 0.32% at June 30, 2024.

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 in 2023.

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. The FOMC raised the federal funds target rate four times in 2023 for a total of 100 basis points and has suggested it may lower interest rates in 2024. 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 June 30, 2024, interest-bearing liabilities exceeded interest-earning assets that mature or reprice within one year (interest-sensitive gap) by $62.0 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 99.32% at June 30, 2024 compared with 99.67% at December 31, 2023. Likewise, the one-year interest-sensitive gap as a percentage of total assets was (0.30)% at June 30, 2024 compared with (0.14)% at December 31, 2023.

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 June 30, 2024 and December 31, 2023:

(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 June 30, 2024: Net income for the three months ended June 30, 2024 was $69.3 million, compared to $68.7 million for the three months ended June 30, 2023.

• Net interest income decreased $7.4 million, primarily due to lagging increases in deposit pricing following rate hikes in 2023 and a continued shift to customer time deposits. See “Net Interest Income” for further information.
• Our provision for credit losses increased $4.0 million, primarily due to a higher provision on our commercial mortgages portfolio. See “Allowance for Credit Losses” for further information.
• Noninterest income increased $24.7 million, primarily due to increases in income from Cash Connect® due to additional customers added during the fourth quarter of 2023 and first half of 2024 and the higher rate environment, Wealth Management fee income, a gain on our Visa B derivative liability, post-close distributions from our investment in Spring EQ, and capital markets income. See “Noninterest Income” for further information.
• Noninterest expense increased $14.5 million, primarily due to higher salaries and benefits and Cash Connect® funding costs associated with a shift towards external funding, partially offset by decreases in net corporate development and restructuring costs, loan workout and OREO expenses, and professional fees.
• Income tax provision decreased $1.8 million, primarily due to the $1.2 million decrease in pre-tax income, the benefit from solar and other tax credit investments, and lower state income taxes.

Six months ended June 30, 2024: Net income for the six months ended June 30, 2024 was $135.0 million, compared to $131.1 million for the six months ended June 30, 2023.

• Net interest income decreased $14.6 million during the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to the reasons described above. See “Net Interest Income” for further information.
• Our provision for credit losses for the six months ended June 30, 2024 decreased $9.9 million compared to the six months ended June 30, 2023, due to lower losses across most of our commercial loan portfolios and our consumer portfolio, partially offset by higher losses on our commercial mortgages portfolio. See “Allowance for Credit Losses” for further information.
• Noninterest income for the six months ended June 30, 2024 increased $37.5 million compared to the six months ended June 30, 2023, primarily due to increases from Cash Connect®, Wealth Management fee income, a gain on our Visa B derivative liability, capital markets income, post-close distributions from our investment in Spring EQ, and mortgage banking activities. See “Noninterest Income” for further information.
• Noninterest expense increased $30.5 million during the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to an increase in Cash Connect® funding costs associated with a shift towards external funding and salaries and benefits, partially offset by decreases in net corporate development and restructuring costs, occupancy expense, and professional fees.
• Income tax provision for the six months ended June 30, 2024 decreased $1.5 million compared to the six months ended June 30, 2023, primarily due to the benefit from solar and other tax credit investments and lower state income taxes.

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 June 30, 2024: During the three months ended June 30, 2024, net interest income decreased $7.4 million from the three months ended June 30, 2023 primarily due to lagging deposit pricing increases following rate hikes in 2023 and a continued shift to customer time deposits. Net interest margin was 3.85% for the second quarter of 2024, a 26 basis point decrease compared to 4.11% for the second quarter of 2023. The decrease was due to an unfavorable decrease of 40 basis points from the lagging deposit pricing increases mentioned above and 4 basis points from purchase accounting accretion, partially offset by an increase of 18 basis points from our balance sheet size and mix.

Six months ended June 30, 2024: During the six months ended June 30, 2024, net interest income decreased $14.6 million from the six months ended June 30, 2023 due to the reasons noted above. Net interest margin was 3.85% for the six months ended June 30, 2024, a 33 basis point decrease compared to 4.18% for the six months ended June 30, 2023. The decrease was due to a 44 basis point decrease from the lagging deposit increases noted above and a 4 basis point decrease from purchase accounting accretion, partially offset by a 15 basis point increase from our balance sheet size and mix.

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 June 30, 2024, we recorded a provision for credit losses of $19.8 million, an increase of $4.0 million, as compared with the provision for credit losses of $15.8 million for the three months ended June 30, 2023. This increase was primarily due to a higher provision on our commercial mortgages portfolio.

During the six months ended June 30, 2024, we recorded a provision for credit losses of $35.0 million, a decrease of $9.9 million, as compared with the provision for credit losses of $44.8 million for the six months ended June 30, 2023. This decrease was primarily due to lower losses across most of our commercial loan portfolios and our consumer portfolio, partially offset by higher losses on our commercial mortgages portfolio.

The allowance for credit losses increased to $198.3 million at June 30, 2024 from $186.1 million at December 31, 2023. The ratio of allowance for credit losses to total loans and leases was 1.51% at June 30, 2024 and 1.46% at December 31, 2023.

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

(Dollars in thousands)

(1) Excludes reverse mortgages.

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

(Dollars in thousands)

(1) Excludes reverse mortgages.

(2) 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 June 30, 2024: During the three months ended June 30, 2024, noninterest income was $91.6 million, an increase of $24.7 million from $66.9 million during the three months ended June 30, 2023. The increase was primarily driven by $11.0 million from Cash Connect® due to the addition of customers during the fourth quarter of 2023 and first half of 2024 and the higher rate environment, $5.3 million in Wealth Management fees, a $3.4 million gain due to the reduction of our Visa B derivative liability established from our previous sale of 360,000 shares in 2Q 2020, a $2.0 million gain from post-close distributions from our investment in Spring EQ, and $1.8 million in capital markets income.

Six months ended June 30, 2024: During the six months ended June 30, 2024, noninterest income was $167.5 million, an increase of $37.5 million from $130.0 million during the six months ended June 30, 2023. This increase was primarily driven by $19.2 million from Cash Connect® due to the reason mentioned above, $7.7 million in Wealth Management fees, the $3.4 million gain on our Visa B derivative liability mentioned above, $2.0 million in capital markets income, the $2.0 million gain related to Spring EQ mentioned above, and $1.4 million from mortgage banking activities.

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

Noninterest Expense

Three months ended June 30, 2024: During the three months ended June 30, 2024, noninterest expense was $155.8 million, an increase of $14.5 million from $141.3 million for the three months ended June 30, 2023. The increase was primarily due to $10.9 million from salaries and benefits costs and $9.5 million from other operating expense driven by higher funding costs from Cash Connect® due to a shift towards external funding, partially offset by decreases of $2.6 million in net corporate development and restructuring costs, $1.8 million in loan workout and OREO expenses, and $1.3 million in professional fees.

Six months ended June 30, 2024: During the six months ended June 30, 2024, noninterest expense was $304.8 million, an increase of $30.5 million from $274.3 million for the six months ended June 30, 2023. The increase was primarily due to $20.8 million in other operating expense driven by higher funding costs from Cash Connect® due to a shift towards external funding and $13.8 million in salaries and benefits, partially offset by a $2.4 million decrease in net corporate development and restructuring costs, $1.7 million in occupancy expense, and $1.3 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 $21.3 million and $42.5 million during the three and six months ended June 30, 2024, respectively, compared to income tax expense of $23.0 million and $44.0 million for the same periods in 2023, respectively.

Our effective tax rate was 23.5% and 23.9% for the three and six months ended June 30, 2024, respectively, compared to 25.1% for both the three and six months ended June 30, 2023. The effective tax rate for the three and six months ended June 30, 2024 decreased primarily due to an increase in projected tax benefits from our low-income housing tax credit investments, solar tax credit investments made during the current quarter, as well as a reduction in state income taxes.

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, solar 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, tax deficiencies from recognized stock compensation, 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 2024, 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 June 30, 2024 did not significantly change from our critical accounting estimates at December 31, 2023, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

RECENT REGULATORY DEVELOPMENTS

Recent regulatory developments at June 30, 2024 did not significantly change from our recent regulatory developments at December 31, 2023, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

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 June 30, 2024.

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, 2023.