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 Bankor 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 billionin assets and $61.4 billionin assets under management (AUM) and assets under administration (AUA) at September 30, 2022, WSFS Bankis the oldest and largest locally-managed bank and trust company headquartered in the Greater Philadelphiaand Delawareregion. As a federal savings bank that was formerly chartered as a state mutual savings bank, WSFS Bankenjoys a broader scope of permissible activities than most other financial institutions. A fixture in the community, we have been in operation for more than 190 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, 2022, we had seven consolidated subsidiaries: WSFS Bank, WSFS Wealth Management, LLC(Powdermill®), WSFS Capital Management, LLC( West Capital), Cypress Capital Management, LLC(Cypress), WSFS SPE Services, LLC, The Bryn Mawr Trust Company of Delaware(BMT-DE), 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 Bankhas 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, 2022, WSFS and the Bank acquired certain subsidiaries in the merger of Bryn Mawr Bank Corporation(BMBC) with and into WSFS, and the merger of The Bryn Mawr Trust Companywith and into the Bank (collectively, the BMBC Merger), pursuant to the agreement and plan of merger, by and between WSFS and BMBC, dated as of March 9, 2021(the BMBC Merger Agreement) that are not named herein as they are not integral or significant to our business. On April 1, 2022, WSFS completed the merger of Christiana Trust Companyof Delaware® and BMT-DE. The combined organization will retain and operate under The Bryn Mawr Trust Company of Delawarename. Additionally on April 1, 2022, Bryn Mawr Equipment Finance, Inc.merged with and into BEFC. On April 29, 2022, the portfolio of KCMI Capital, Inc.(KCMI), a specialized commercial lending unit acquired in the BMBC merger and not core to our overall lending strategy, was sold at par value for $55.5 million. Finally, on June 30, 2022, the business of BMT Insurance Advisors(BMTIA), was sold to Patriot Growth Services, LLC. Our banking business had a total loan and lease portfolio of $11.7 billionas of September 30, 2022, which was funded primarily through commercial relationships and retail and customer generated deposits. We have built a $9.3 billioncommercial 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 retail safes nationwide, and manages approximately $1.7 billionin total cash and services approximately 27,000 non-bank ATMs and 7,300 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 branded ATMs for WSFS BankCustomers, which is one of the largest branded ATM networks in our market. 55
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
$61.4 billionof AUM and AUA at September 30, 2022. Bryn Mawr Trust® is our predominant Wealth Management brand, providing advisory, investment management and trustee services to institutions, affluent and high-net-worth individuals. WSFS Wealth® Investments provides financial advisory services along with annuities 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. WSFS Institutional Services® provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional, corporate clients and special purpose vehicles. BMT-DE provides personal trust and fiduciary services to families and individuals across the U.S.Powdermill® is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Private Banking serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management businesses to provide comprehensive solutions to clients. As of September 30, 2022, we service our customers primarily from 119 offices located in Pennsylvania(61), Delaware(39), New Jersey, (17), Virginia(1) and Nevada(1), our ATM network, our website at www.wsfsbank.com and our mobile app.
Highlights and Other Notable Items for the Three and Nine Months Ended
•Three months completed
•WSFS repurchased 1,664,550 shares of common stock under the Company's share repurchase program at an average price of
$48.66per share, for an aggregate purchase price of $81.0 million.
•The Board of Directors approved a
• Provision for credit losses (ACL) on loans and leases increased
• Value adjustment of
•Net development and restructuring expenses of
• Nine months ended
•We successfully closed the BMBC Merger on
January 1, 2022. The total value of consideration paid of $908.0 millionand $497.2 millionin net assets acquired resulted in $410.8 millionof goodwill recognized, as adjusted.
• Originally added BMBC merger
• We have registered
restructuring charges during the nine months ended
•During the nine months ended
September 30, 2022, the ACL increased $51.7 million, primarily due to an initial ACL of $49.6 millionrecorded in connection with the BMBC Merger. The initial $49.6 millionACL recorded includes $23.5 millionrelated to non-purchase credit deteriorated (PCD) loans, or the initial provision for credit loss recorded, and $26.1 millionrelated to PCD loans, which did not have an initial income statement impact, but adjusted the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up).
• $1.1 billion of available-for-sale mortgage-backed securities (“AFS”), or 19% of the AFS portfolio, have been designated as held-to-maturity (“HTM”) in order to limit the impact on capital of rising interest rates.
• KCMI’s loan portfolio was sold at face value for
• BMTIA’s business was sold to
•During the nine months ended
September 30, 2022, WSFS repurchased 3,789,137 shares of common stock under the Company's share repurchase program at an average price of $46.68per share, for an aggregate purchase price of $176.9 million. 56
Total assets increased
•Net loans and leases, excluding loans held for sale, increased
$3.8 billionprimarily driven by the $3.5 billionof loans and leases acquired in the BMBC Merger partially offset by the initial $49.6 millionACL recorded in connection with the BMBC Merger.
• Goodwill and intangible assets increased
• Other assets increased
increase in our tax asset related to unrealized capital losses on AFS securities and
• Total cash and cash equivalents decreased
acquired in the BMBC merger.
• Loans held for sale decreased
• Total marketable securities decreased
• Marketable securities held to maturity increased
•Investment securities, available-for-sale decreased
$1.1 billionduring the nine months ended September 30, 2022, primarily due to the designation of AFS MBS to HTM as mentioned above, repayments of $911.1 millionand decreased market values on available-for-sale securities of $741.9 million. These decreases were partially offset by $1.2 billionin purchases and $500.4 millionacquired in the BMBC merger.
Total liabilities increased
• Total deposits increased
•Other liabilities increased
$419.4 millionprimarily due to a net increase of $323.4 millionin collateral held on derivatives and derivative liabilities driven by rising interest rates and $124.6 millionof BMT acquired liabilities, partially offset by $34.5 millionlower accrued expenses reflecting the timing of settlement for debt security trades.
• Increase in senior and subordinated debt
For more information, see “Notes to the consolidated financial statements (unaudited)”.
Loans and leases
The following table shows the remaining contractual maturity and rate sensitivity of the loan portfolio by loan category as of
September 30, 2022. Loans may be pre-paid, so the actual maturity may differ from the contractual maturity. Prepayments tend to be highly dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are reported in the "Less than One Year" category. Less than One to Five to Fifteen Over Fifteen (Dollars in thousands) One Year Five Years Years Years Total Commercial and industrial(1) Interest rate: Fixed $ 15,475 $ 495,658 $ 197,630 $ 43,797 $ 752,560Adjustable 184,329 1,167,164 467,945 62,788 1,882,226 Total $ 199,804 $ 1,662,822 $ 665,575 $ 106,585 $ 2,634,786Owner-occupied commercial Interest rate: Fixed $ 25,640 $ 389,029 $ 421,245 $ 181,722 $ 1,017,636Adjustable 30,759 254,097 421,692 64,407 770,955 Total $ 56,399 $ 643,126 $ 842,937 $ 246,129 $ 1,788,591Commercial mortgages Interest rate: Fixed $ 64,581 $ 802,113 $ 423,043 $ 161,740 $ 1,451,477Adjustable 61,080 651,929 1,032,873 83,020 1,828,902 Total $ 125,661 $ 1,454,042 $ 1,455,916 $ 244,760 $ 3,280,379Construction Interest rate: Fixed $ 1,155 $ 34,486 $ 38,734 $ 6,216 $ 80,591Adjustable 177,825 530,558 232,429 6,800 947,612 Total $ 178,980 $ 565,044 $ 271,163 $ 13,016 $ 1,028,203Commercial small business leases Interest rate: Fixed $ 5,205 $ 469,546 $ 59,941$ - $ 534,692Adjustable - - - - - Total $ 5,205 $ 469,546 $ 59,941$ - $ 534,692Residential(2) Interest rate: Fixed $ 7,582 $ 25,044 $ 117,753 $ 471,941 $ 622,320Adjustable(3) - 427 27,236 108,610 136,273 Total $ 7,582 $ 25,471 $ 144,989 $ 580,551 $ 758,593Consumer Interest rate: Fixed $ 247 $ 350,159 $ 387,132 $ 379,972 $ 1,117,510Adjustable 4,282 74,580 30,370 450,386 559,618 Total $ 4,529 $ 424,739 $ 417,502 $ 830,358 $ 1,677,128Total loans and leases $ 578,160 $ 5,244,790 $ 3,858,023 $ 2,021,399 $ 11,702,372
The following table shows the maturities of the certificates of deposit of
or more from
(Dollars in thousands) Maturity Period September 30, 2022 Less than 3 months $ 60,704 Over 3 months to 6 months 17,287 Over 6 months to 12 months 48,388 Over 12 months 41,338 Total $ 167,717
The estimated amount of total uninsured deposits at
CASH AND CAPITAL RESOURCES
Stockholders' equity of WSFS increased
$164.5 millionbetween December 31, 2021and September 30, 2022. This increase was primarily due to $908.0 millionof WSFS common shares issued in connection with the BMBC Merger and $137.9 millionof earnings, offset by a decrease of $677.7 millionin accumulated other comprehensive income from market value decreases on investment securities resulting from the current rising interest rate environment, $176.9 millionfrom the repurchase of shares of common stock under our stock repurchase plan, and the payment of dividends on our common stock of $26.5 million. During the third quarter of 2022, our Board of Directors approved a quarterly cash dividend of $0.15per share of common stock. This dividend will be paid on November 18, 2022to stockholders of record as of November 4, 2022. Book value per share of common stock was $33.96at September 30, 2022, a decrease of $6.77from $40.73at December 31, 2021. Tangible book value per share of common stock (a non-GAAP financial measure) was $17.55at September 30, 2022, a decrease of $11.69from $29.24at December 31, 2021. These decreases are primarily due to increases in our outstanding shares, goodwill, and intangible assets as a result of the BMBC Merger. 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." 59
The table below compares the consolidated capital position of the Bank and the Company to the minimum regulatory requirements as of
To be Well-Capitalized Consolidated
Minimum For Capital
Under Prompt Fix
Capital Adequacy Purposes Action Provisions (Dollars in thousands) Amount Percent Amount Percent Amount Percent Total Capital (to Risk-Weighted Assets) Wilmington Savings Fund Society, FSB
$ 2,064,36413.34 % $ 1,238,2558.00 % $ 1,547,819 10.00 % WSFS Financial Corporation 2,163,310 13.94 1,241,408 8.00 1,551,760 10.00 Tier 1 Capital (to Risk-Weighted Assets) Wilmington Savings Fund Society, FSB 1,915,598 12.38 928,691 6.00 1,238,255 8.00 WSFS Financial Corporation 1,844,792 11.89 931,056 6.00 1,241,408 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets) Wilmington Savings Fund Society, FSB 1,915,598 12.38 696,518 4.50 1,006,082 6.50 WSFS Financial Corporation 1,844,792 11.89 698,292 4.50 1,008,644 6.50 Tier 1 Leverage CapitalWilmington Savings Fund Society, FSB 1,915,598 9.76 784,766 4.00 980,957 5.00 WSFS Financial Corporation 1,844,792 9.39 785,658 4.00 982,073 5.00 Under the prompt corrective action regime, regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution's capital tier depends on its capital levels in relation to various relevant capital measures, which include 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, 2022, 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 held separately
As part of our adoption of the Current Expected Credit Losses (CECL) methodology in 2020, we elected to phase in the day-one adverse effects on regulatory capital that may result from the adoption of CECL over a three-year period, as permitted under a final rule of the federal banking agencies. 60 -------------------------------------------------------------------------------- Table of Contents Liquidity We manage our liquidity and funding needs through our
Treasuryfunction 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, 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 and beyond. As of September 30, 2022, the Corporation has $1.0 billionin cash, cash equivalents, and restricted cash. Additionally, the maximum borrowing capacity with the FHLB was $4.9 billionwith an unused borrowing availability of $4.9 billion. Borrowing availability at the Federal Reserve Discount Window was $213.3 million, and borrowing availability through the overnight fed funds lines totaled $1.3 billion. Our primary cash contractual obligations relate to operating leases, long-term debt, credit obligations, and data processing. At September 30, 2022, we had $245.4 millionin total contractual payments for ongoing leases that have remaining lease terms of less than one year to 39 years, which includes renewal options that are exercised at our discretion. For additional information on our operating leases see Note 9 to the unaudited Consolidated Financial Statements. At September 30, 2022, we had no FHLB advances, and obligations for principal payments on long-term debt included $67.0 millionfor our trust preferred borrowings, due June 1, 2035, and $150.0 millionfor our senior debt, due December 15, 2030. In connection with the BMBC Merger, we assumed debt in the form of $30.0 millionin aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 and $70.0 millionin aggregate principal amount of fixed-to-floating rate subordinated notes due 2027. We also acquired Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust II (Trust II) (collectively, the Trusts), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although WSFS owns an aggregate of $774.0 thousandof 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 $11.7 millioneach, totaling $23.4 million. The Company records its investments in the Trusts' common securities of $387.0 thousandeach 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. For additional information regarding long-term debt, see Note 12 to the unaudited Consolidated Financial Statements. At September 30, 2022, the Company had total commitments to extend credit of $3.6 billion, which are generally one year commitments. In 2022, we plan to invest approximately $13.0 millionin 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 improvement. 61
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 non-performing assets and past due loans as of the dates indicated:
(Dollars in thousands) September 30, 2022 December 31, 2021 Nonaccruing loans: Commercial and industrial $ 4,837 $ 8,211 Owner-occupied commercial 339 811 Commercial mortgages 5,060 2,070 Construction 5,158 12 Residential 2,023 3,125 Consumer 1,952 2,380 Total nonaccruing loans 19,369 16,609 Other real estate owned 840 2,320 Restructured loans(1)(6) 17,108 14,204 Total nonperforming assets $ 37,317 $ 33,133 Past due loans: Commercial $ 10,351 $ 1,357 Residential 1,094 - Consumer (2) 13,309 8,634 Total past due loans $ 24,754 $ 9,991
Ratio of allowance for credit losses to total loans and leases(3)
1.14 % 1.19 %
Ratio of non-current loans to total gross loans and leases(4)
0.17 0.21 Ratio of nonperforming assets to total assets 0.19 0.21
Ratio of allowance for credit losses to unearned loans
755 569 Ratio of allowance for credit losses to total nonperforming assets(5) 392 285 (1)Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans. (2)Includes
U.S.government guaranteed student loans with little risk of credit loss. (3)Represents amortized cost basis for loans, leases and held-to-maturity securities. (4)Total loans exclude loans held for sale and reverse mortgages. (5)Excludes acquired impaired loans. (6)Balance excludes COVID-19 modifications. Nonperforming assets increased $4.2 millionbetween December 31, 2021and September 30, 2022. This increase was primarily due to the transfer in of one commercial relationship totaling $5.5 millionand one CRE relationship totaling $2.6 millionduring the period. These inflows were partially offset by a partial charge-off on the CRE relationship of $0.5 million, several smaller payoffs and the continued collection of principal payments on the majority of these loans. The ratio of nonperforming assets to total assets decreased from 0.21% at December 31, 2021to 0.19% at September 30, 2022. 62
The following table summarizes the changes in nonperforming assets during the periods indicated: Nine Months Ended September 30, (Dollars in thousands) 2022 2021 Beginning balance $ 33,133
$ 60,508Additions 24,513 42,159 Collections (15,909) (29,669) Transfers to accrual (922) (494) Charge-offs (3,498) (20,674) Ending balance $ 37,317 $ 51,830The 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. 63
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 FOMCreduced interest rates through 2020 and 2021 and instituted quantitative easing measures as well as domestic and global capital market support programs. The FOMCraised the federal funds target rate six times in 2022 for a total of 375 basis points, and has suggested it may continue raising interest rates further in 2022. 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, 2022, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $1.8 billion. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 125.53% at September 30, 2022compared with 120.40% at December 31, 2021. Likewise, the one-year interest-sensitive gap as a percentage of total assets was 8.82% at September 30, 2022compared with 7.28% at December 31, 2021. The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at September 30, 2022are shown in the following table: Less than One to Five Five to Fifteen Over Fifteen (Dollars in thousands) One Year Years Years Years Total Interest-rate sensitive assets: Loans: Commercial loans and leases(2) $ 4,377,434 $ 1,383,350 $ 309,062 $ 9,782 $ 6,079,628Commercial mortgage loans(2) 2,289,686 812,905 186,985 4,379 3,293,955 Residential(1)(2) 161,847 280,689 264,627 81,090 788,253 Consumer(2) 902,140 552,287 184,645 3,846 1,642,918 Loans held for sale(2) 63,564 1,671 2,274 1,500 69,009 Investment securities, available-for-sale 760,150 2,058,029 2,132,124 194,734 5,145,037 Investment securities, held-to-maturity 91,667 333,596 528,240 168,402 1,121,905 Other interest-earning assets 24,117 - - - 24,117 Total interest-rate sensitive assets: $ 8,670,605 $ 5,422,527 $ 3,607,957 $ 463,733 $ 18,164,822Interest-rate sensitive liabilities: Interest-bearing deposits: Interest-bearing demand $ 1,730,882$ - $ - $ - $ 1,730,882Savings 1,270,812 - - - 1,270,812 Money market 2,911,497 - - - 2,911,497 Customer time deposits 747,654 311,708 2,029 - 1,061,391 Trust preferred borrowings 90,393 - - - 90,393 Senior and subordinated debt 100,143 148,112 - - 248,255 Other borrowed funds 55,893 - - - 55,893 Total interest-rate sensitive liabilities: $ 6,907,274 $ 459,820 $ 2,029$ - $ 7,369,123Excess of interest-rate sensitive assets over interest-rate liabilities (interest-rate sensitive gap) $ 1,763,331 $ 4,962,707 $ 3,605,928 $ 463,733 $ 10,795,699One-year interest-rate sensitive assets/interest-rate sensitive liabilities 125.53 % One-year interest-rate sensitive gap as a percent of total assets 8.82 % (1)Includes reverse mortgage loans (2)Loan balances exclude nonaccruing loans, deferred fees and costs 64
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 levels specified in
September 30, 2022 December 31, 2021 % Change in Interest % Change in Net % Change in Net Economic Value of Rate (Basis Points) Interest Margin(1) Economic Value of Equity(2) Interest Margin(1) Equity(2) +300 20.4% 29.53% 25.1% 24.27% +200 13.5% 28.36% 16.6% 23.07% +100 6.8% 27.08% 8.2% 21.76% +50 3.4% 25.60% 4.1% 20.33% +25 1.7% 25.38% 2.0% 20.05% - -% 25.14% -% 19.73% -25 (1.8)% 24.88% (1.4)% 19.28% -50 (3.7)% 24.57% (2.2)% 18.72% -100 (7.7)% 23.85% (3.8)% 17.36% '-200(3) (15.9)% 22.08% NMF NMF '-300(4) NMF NMF NMF NMF (1)The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments. (2)The economic value of equity ratio in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments. (3)At
December 31, 2021, sensitivity indicated by a decrease of 200 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates in the period. (4)Sensitivity indicated by a decrease of 300 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates in the periods presented.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking income and expenses may fluctuate with changes in interest rates. These fluctuations are difficult to model and estimate.
RESULTS OF OPERATIONS
Three months ended
September 30, 2022: Net income for the three months ended September 30, 2022was $73.4 million, compared to $54.4 millionfor the three months ended September 30, 2021. •Net interest income increased $72.3 millionduring the three months ended September 30, 2022compared to the three months ended September 30, 2021, primarily due to an increase from the balance sheet size and mix from the BMBC Merger and the rising interest rate environment, offset by lower purchase accounting accretion and the impact of PPP loans. See "Net Interest Income" for further information. •Our provision for credit losses for the three months ended September 30, 2022increased $28.8 millioncompared to the three months ended September 30, 2021, primarily due to the release of ACL reserves that occurred in 2021 as a result of positive economic forecasts following the impact of the COVID-19 pandemic. See "Allowance for Credit Losses" for further information. •Noninterest income for the three months ended September 30, 2022increased $20.0 millioncompared to the three months ended September 30, 2021, due to increased Wealth Management revenue that is primarily attributable to the BMBC Merger, higher other banking fees, Cash Connect®, and capital markets income, partially offset by a decline in our mortgage banking business. See "Noninterest Income" for further information. •Noninterest expense increased $36.5 millionduring the three months ended September 30, 2022compared to the three months ended September 30, 2021, primarily due to higher costs after the BMBC Merger. These increases include salaries and benefits and variable operating costs. See "Noninterest Expense" for further information. •Income tax provision for the three months ended September 30, 2022increased $8.3 millioncompared to the three months ended September 30, 2021, primarily due to the $27.1 millionincrease in pre-tax income.
End of nine months
• Net interest income increased
•Our provision for credit losses for the nine months ended
September 30, 2022increased $143.7 millioncompared to the nine months ended September 30, 2021, due to the reasons described above and the initial provision for credit losses of $23.5 millionrecorded in connection with the BMBC Merger. See "Allowance for Credit Losses" for further information. •Noninterest income for the nine months ended September 30, 2022increased $55.8 millioncompared to the nine months ended September 30, 2021, primarily due to the reasons described above. See "Noninterest Income" for further information. •Noninterest expense increased $153.3 millionduring the nine months ended September 30, 2022compared to the nine months ended September 30, 2021, due to the reasons described above, including increases in net corporate development and restructuring costs, salaries and benefits, and variable operating costs. See "Noninterest Expense" for further information. •Income tax provision for the nine months ended September 30, 2022decreased $20.7 millioncompared to the nine months ended September 30, 2021, primarily due to the $97.7 milliondecrease in pre-tax income. 66
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: Three months ended September 30, 2022 2021 Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate(1) Balance Interest Rate(1) Assets: Interest-earning assets: Loans:(2) Commercial loans and leases
$ 4,895,972 $ 67,0605.45 % $ 3,623,187 $ 43,3354.75 % Commercial real estate loans 4,262,599 53,096 4.94 2,788,963 28,454 4.05 Residential loans 769,151 8,379 4.36 601,998 9,245 6.14 Consumer loans 1,594,673 23,384 5.82 1,109,188 11,639 4.16 Loans held for sale 66,103 968 5.81 90,635 787 3.44 Total loans and leases 11,588,498 152,887 5.24 8,213,971 93,460 4.52 Mortgage-backed securities(3) 5,243,169 28,338 2.16 3,397,297 13,947 1.64 Investment securities(3) 361,113 1,981 2.57 319,226 1,353 1.89 Other interest-earning assets 460,124 3,359 2.90 1,697,840 691 0.16 Total interest-earning assets $ 17,652,904 $ 186,5654.21 % $ 13,628,334 $ 109,4513.19 % Allowance for credit losses (143,943) (125,830) Cash and due from banks 242,734 145,547 Cash in non-owned ATMs 603,780 481,755 Bank-owned life insurance 100,863 33,349 Other noninterest-earning assets 1,779,411 974,417 Total assets $ 20,235,749 $ 15,137,572Liabilities and Stockholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 3,370,158 $ 2,1790.26 % $ 2,698,391 $ 5730.08 % Savings 2,287,227 185 0.03 1,931,433 139 0.03 Money market 3,833,113 2,907 0.30 2,761,222 780 0.11 Customer time deposits 1,083,290 1,230 0.45 1,045,746 1,646 0.62 Total interest-bearing customer deposits 10,573,788 6,501 0.24 8,436,792 3,138 0.15 Brokered deposits 24,184 142 2.33 58,645 412 2.79 Total interest-bearing deposits 10,597,972 6,643 0.25 8,495,437 3,550 0.17 Federal Home Loan Bank advances 4,979 42 3.35 - - - Trust preferred borrowings 90,361 951 4.18 67,011 316 1.87 Senior and subordinated debt 248,332 2,061 3.32 147,730 1,089 2.95 Other borrowed funds(4) 39,745 37 0.37 23,324 5 0.09 Total interest-bearing liabilities $ 10,981,389 $ 9,7340.35 % $ 8,733,502 $ 4,9600.23 % Noninterest-bearing demand deposits 6,319,755 4,177,984 Other noninterest-bearing liabilities 589,817 320,421 Stockholders' equity 2,347,178 1,907,868 Noncontrolling interest (2,390) (2,203) Total liabilities and stockholders' equity $ 20,235,749 $ 15,137,572Excess of interest-earning assets over interest-bearing liabilities $ 6,671,515 $ 4,894,832Net interest income $ 176,831 $ 104,491Interest rate spread 3.86 % 2.96 % Net interest margin 3.99 % 3.05 % (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. 67
Table of Contents Nine months ended September 30, 2022 2021 Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate(1) Balance Interest Rate(1) Assets: Interest-earning assets: Loans:(2) Commercial loans and leases
$ 4,860,079 $ 176,4764.87 % $ 3,885,392 $ 141,9944.89 % Commercial real estate loans 4,263,906 137,183 4.30 2,794,540 85,922 4.11 Residential loans 799,980 26,810 4.47 660,858 33,380 6.73 Consumer loans 1,472,878 57,900 5.26 1,130,554 36,425 4.31 Loans held for sale 69,068 2,741 5.31 127,535 3,236 3.39 Total loans and leases 11,465,911 401,110 4.68 8,598,879 300,957 4.68 Mortgage-backed securities(3) 5,253,248 78,828 2.00 2,964,437 37,157 1.67 Investment securities 325,960 4,642 2.21 324,620 4,185 1.95 Other interest-earning assets 1,124,922 6,142 0.73 1,407,422 1,335 0.13 Total interest-earning assets $ 18,170,041 $ 490,7223.62 % $ 13,295,358 $ 343,6343.46 % Allowance for credit losses (138,532) (181,947) Cash and due from banks 240,421 145,571 Cash in non-owned ATMs 560,202 448,244 Bank-owned life insurance 100,659 32,615 Other noninterest-earning assets 1,728,847 990,187 Total assets $ 20,661,638 $ 14,730,028Liabilities and Stockholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 3,384,443 $ 3,7010.15 % $ 2,610,795 $ 1,7220.09 % Savings 2,276,861 506 0.03 1,895,221 438 0.03 Money market 3,969,219 5,063 0.17 2,733,068 2,435 0.12 Customer time deposits 1,132,489 3,826 0.45 1,080,149 5,865 0.73 Total interest-bearing customer deposits 10,763,012 13,096 0.16 8,319,233 10,460 0.17 Brokered deposits 40,866 441 1.44 86,050 1,364 2.12 Total interest-bearing deposits 10,803,878 13,537 0.17 8,405,283 11,824 0.19 Federal Home Loan Bank advances 1,678 42 3.35 243 5 2.63 Trust preferred borrowings 90,313 2,146 3.18 67,011 957 1.91 Senior debt 248,448 5,939 3.19 207,186 5,408 3.48 Other borrowed funds(4) 36,401 54 0.20 21,561 15 0.09 Total interest-bearing liabilities $ 11,180,718 $ 21,7180.26 % $ 8,701,284 $ 18,2090.28 % Noninterest-bearing demand deposits 6,466,720 3,879,948 Other noninterest-bearing liabilities 526,945 324,011 Stockholders' equity 2,489,860 1,827,007 Noncontrolling interest (2,605) (2,222) Total liabilities and stockholders' equity $ 20,661,638 $ 14,730,028Excess of interest-earning assets over interest-bearing liabilities $ 6,989,323 $ 4,594,074Net interest and dividend income $ 469,004 $ 325,425Interest rate spread 3.36 % 3.18 % Net interest margin 3.46 % 3.28 % (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. 68
Three months ended
September 30, 2022: During the three months ended September 30, 2022, net interest income increased $72.3 millionfrom the three months ended September 30, 2021primarily due to a $74.6 millionincrease from the balance sheet size and mix from the BMBC Merger and the rising interest rate environment, offset by $2.6 millionfrom the impact of PPP loans and a $2.2 milliondecrease in purchase accounting accretion. Net interest margin was 3.99% for the third quarter of 2022, a 94 basis point increase compared to 3.05% for the third quarter of 2021 due to a favorable increase of 70 basis points from rising interest rate environment and 38 basis points from the balance sheet size and mix, offset by reductions of 9 basis points from lower purchase accounting accretion and 5 basis points from PPP loans. Nine months ended September 30, 2022: During the nine months ended September 30, 2022, net interest income increased $143.6 millionfrom the nine months ended September 30, 2021. This increase included $174.0 millionfrom balance sheet size and mix from the BMBC Merger and the rising interest rate environment, partially offset by $17.7 millionof PPP income recognized during the nine months ended September 30, 2021and a $12.7 milliondecrease in purchase accounting accretion. Net interest margin was 3.46% for the nine months ended September 30, 2022, an 18 basis point increase compared to 3.28% for the nine months ended September 30, 2021reflecting a 42 basis point increase due to balance sheet size and mix and the rising interest rate environment, partially offset by a 16 basis points decrease from lower purchase accounting accretion and 8 basis points from PPP loans. 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. Nine Months Ended September 30, 2022 vs. 2021 (Dollars in thousands) Volume Yield/Rate Net Interest Income: Loans: Commercial loans and leases(1) $ 35,458 $ (976) $ 34,482Commercial mortgage loans 47,118 4,143 51,261 Residential 8,978 (15,548) (6,570) Consumer 12,428 9,047 21,475 Loans held for sale (2,412) 1,917 (495) Mortgage-backed securities 33,179 8,492 41,671 Investment securities(2) 14 443 457 Other interest-earning assets (503) 5,310 4,807 Favorable (unfavorable) 134,260 12,828 147,088 Interest expense: Deposits: Interest-bearing demand 609 1,370 1,979 Money market 1,367 1,261 2,628 Savings 68 - 68 Customer time deposits 450 (2,489) (2,039) Brokered certificates of deposits (573) (350) (923) FHLB advances 36 2 38 Trust preferred borrowings 408 781 1,189 Senior and subordinated debt 1,222 (691) 531 Other borrowed funds 14 25 39 Unfavorable (favorable) 3,601 (91) 3,510 Net change, as reported $ 130,659 $ 12,919 $ 143,578
(1)Includes income adjustment equivalent to tax related to commercial loans. (2)Includes income adjustment equivalent to municipal bond tax.
Provision 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, 2022, we recorded a provision for credit losses of $7.5 million, a net change of $28.8 million, as compared with the recovery of credit losses of $21.3 millionfor the three months ended September 30, 2021. The increase is primarily due to the release of ACL reserves in 2021 from positive economic forecasts following the impact of the COVID-19 pandemic. During the nine months ended September 30, 2022, we recorded a provision for credit losses of $34.7 million, a net change of $143.7 million, as compared with the recovery of credit losses of $109.0 millionfor the nine months ended September 30, 2021. The increase was primarily due to the reasons described above and the initial provision for credit losses of $23.5 millionrecorded in connection with the BMBC Merger. The allowance for credit losses increased to $146.2 millionat September 30, 2022from $94.5 millionat December 31, 2021. The increase was primarily due to an initial ACL of $49.6 millionrecorded in connection with the BMBC Merger. The initial $49.6 millionACL recorded includes $23.5 millionrelated to non-PCD loans, or the initial provision for credit loss recorded, and $26.1 millionrelated to PCD loans, which does not have an initial income statement impact, but adjusts the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up). The ratio of allowance for credit losses to total loans and leases was 1.14% at September 30, 2022and 1.19% at December 31, 2021.
The following tables detail the ACL allocation and show our net charges (recoveries) by portfolio category:
Owner- Commercial and occupied Commercial (Dollars in thousands) Industrial(1) Commercial Mortgages Construction Residential(2) Consumer(3) Total As of
September 30, 2022Allowance for credit losses $ 59,884 $ 6,003 $ 21,534 $ 6,499 $ 4,818 $ 47,457 $ 146,195% of ACL to total ACL 41 % 5 % 15 % 4 % 3 % 32 % 100 % Loan portfolio balance $ 3,169,478 $ 1,788,591 $ 3,280,379 $ 1,028,203 $ 758,593 $ 1,677,128 $ 11,702,372% to total loans and leases 27 % 15 % 28 % 9 % 7 % 14 % 100 % Three months ended September 30, 2022 Charge-offs $ 5,120$ - $ 544$ - $ - $ 1,834 $ 7,498Recoveries 3,194 4 101 653 207 114 4,273 Net charge-offs (recoveries) $ 1,926 $ (4) $ 443 $ (653)$ (207) $ 1,720 $ 3,225Average loan balance $ 3,098,451 $ 1,797,521 $ 3,294,284 $ 968,315 $ 766,320 $ 1,594,674 $ 11,519,565Ratio of net charge-offs (recoveries) to average gross loans 0.25 % NMF 0.05 % (0.27) % (0.11) % 0.43 % 0.11 % Nine months ended September 30, 2022 Charge-offs $ 11,308 $ 179 $ 581$ - $ 186 $ 4,062 $ 16,316Recoveries 4,667 271 223 653 737 663 7,214 Net charge-offs (recoveries) $ 6,641 $ (92) $ 358 $ (653)$ (551) $ 3,399 $ 9,102Average loan balance $ 3,017,771 $ 1,842,307
$ 3,332,108 $ 931,799 $ 796,323 $ 1,472,879 $ 11,393,186Ratio 0.29 % (0.01) % 0.01 % (0.09) % (0.09) % 0.31 % 0.11 % (1)Includes commercial small business leases and PPP loans. (2)Excludes reverse mortgages. (3)Includes home equity lines of credit, installment loans unsecured lines of credit and education loans. 70
Table of Contents Owner- Commercial and occupied Commercial (Dollars in thousands) Industrial(1) Commercial Mortgages Construction Residential(2) Consumer(3) Total As of
December 31, 2021Allowance for credit losses $ 49,967 $ 4,574 $ 11,623 $ 1,903 $ 3,352 $ 23,088 $ 94,507% of ACL to total ACL 53 % 5 % 12 % 2 % 4 % 24 % 100 % Loan portfolio balance $ 2,270,319 $ 1,341,707 $ 1,881,510 $ 687,213 $ 542,733 $ 1,158,573 $ 7,882,055% to total loans and leases 28 % 17 % 24 % 9 % 7 % 15 % 100 % Year ended December 31, 2021Charge-offs $ 23,592 $ 83 $ 73 $ 2,473$ - $ 2,094 $ 28,315Recoveries 8,756 160 269 - 789 1,131 11,105 Net charge-offs (recoveries) $ 14,836 $ (77) $ (196) $ 2,473$ (789) $ 963 $ 17,210Average loan balance $ 2,463,933 $ 1,337,883 $ 1,994,995 $ 775,246 $ 628,411 $ 1,134,569 $ 8,335,037Ratio of net charge-offs (recoveries) to average gross loans 0.60 % (0.01) % (0.01) % 0.32 % (0.13) % 0.08 % 0.21 % (1)Includes commercial small business leases and PPP loans. (2)Excludes reverse mortgages. (3)Includes home equity lines of credit, installment loans unsecured lines of credit and education loans.
See Note 8 to the unaudited consolidated financial statements and non-performing assets above for more information.
Three months ended
September 30, 2022: During the three months ended September 30, 2022, noninterest income was $62.7 million, an increase of $20.0 millionfrom $42.6 millionduring the three months ended September 30, 2021. The increase was driven by a $14.2 millionincrease in Wealth Management revenue, of which $12.3 millionwas attributable to the combination with Bryn Mawr Trust. In addition, year-over-year increase included $6.5 millionof other banking fees, including fees associated with our consumer lending partnerships, gain on sale of SBA loans and traditional bank service fees, $4.2 millionin Cash Connect®, and $0.8 millionin capital markets income. Partially offsetting the increase was a $4.2 milliondecline in mortgage banking fees primarily resulting from the decline in refinancing originations compared to the historically higher levels in 3Q 2021. Nine months ended September 30, 2022: During the nine months ended September 30, 2022, noninterest income was $195.3 million, an increase of $55.8 millionfrom $139.5 millionduring the nine months ended September 30, 2021. This increase reflects a $48.3 millionincrease in Wealth Management revenue, of which $42.1 millionwas attributable to the combination with Bryn Mawr Trust, $12.1 millionin other banking fees as described above, $5.8 millionin capital markets income, and $5.4 millionfrom Cash Connect®, partially offset by a $12.2 milliondecrease in mortgage banking activities as described above.
For more information, see note 4 of the unaudited consolidated financial statements.
Three months ended
September 30, 2022: During the three month ended September 30, 2022, noninterest expense was $132.9 million, an increase of $36.5 millionfrom $96.4 millionfor the three months ended September 30, 2021. The increase was primarily due to higher costs after the BMBC Merger. These higher costs included $19.0 millionin salaries and benefits and $8.7 millionof higher variable operating costs, including $2.1 millionfrom Cash Connect®. Nine months ended September 30, 2022: During the nine months ended September 30, 2022, noninterest expense was $441.4 million, an increase of $153.3 millionfrom $288.1 millionfor the nine months ended September 30, 2021. The increase is due to the same reasons described above, which included net corporate development and restructuring costs of $58.2 million, salaries and benefits of $52.5 million, and higher variable operating costs of $27.7 million. 71
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
$25.8 millionand $49.9 millionduring the three and nine months ended September 30, 2022compared to income tax expense of $17.5 millionand $70.6 millionfor the same period in 2021. Our effective tax rate was 26.0% and 26.5% for the three and nine months ended September 30, 2022compared to 24.3% and 24.7% for the same period in 2021. The effective tax rate for both the three and nine months ended September 30, 2022increased primarily due to higher state tax expense resulting from the acquisition of BMT. In addition, we recognized $0.4 millionof tax expense related to nondeductible acquisition costs during the nine months ended September 30, 2022combined with $1.9 millionof tax expense related to nondeductible costs incurred from the sale of the BMTIA business during 2022. 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 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. 72
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