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WSFS FINANCIAL CORP - Quarter Report: 2017 September (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
 
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35638

WSFS FINANCIAL CORPORATION
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
22-2866913
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
500 Delaware Avenue, Wilmington, Delaware
 
19801
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
(302) 792-6000
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
 
 
Not Applicable
 
 
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if smaller reporting company)
  
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The Registrant had 31,389,882 shares of common stock, par value $0.01 per share, outstanding at November 3, 2017.
 



WSFS FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
PART I. Financial Information
Page
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2017 and 2016
Item 2.
Item 3.
Item 4.
PART II. Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:
those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the markets in which the Company operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth;
the Company’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs;
possible additional loan losses and impairment in the collectability of loans;
changes in market interest rates, which may increase funding costs and reduce earning asset yields and thus reduce margin;
the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio;
the credit risk associated with the substantial amount of commercial real estate, construction and land development and commercial and industrial loans in our loan portfolio;
the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued in accordance with this statute and potential expenses associated with complying with such regulations;
the Company’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms;
possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations;
conditions in the financial markets that may limit the Company’s access to additional funding to meet its liquidity needs;
any impairment of the Company’s goodwill or other intangible assets;
failure of the financial and operational controls of the Company’s Cash Connect® division;
the success of the Company’s growth plans, including the successful integration of past and future acquisitions;
the Company’s ability to fully realize the cost savings and other benefits of its acquisitions, business disruption following those acquisitions, and post-acquisition customer acceptance of the Company’s products and services and related customer disintermediation;
negative perceptions or publicity with respect to the Company’s trust and wealth management business;
system failure or cybersecurity breaches of the Company’s network;
the Company’s ability to recruit and retain key employees;
the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally;
the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks;
possible changes in the speed of loan prepayments by the Company’s customers and loan origination or sales volumes;
possible changes in the speed of prepayments of mortgage-backed securities due to changes in the interest rate environment, and the related acceleration of premium amortization on prepayments in the event that prepayments accelerate;
regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its stockholders;

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the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
the effects of other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2016 and other documents filed by the Company with the Securities and Exchange Commission from time to time. 
We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. The Company disclaims any duty to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as specifically required by law.

As used in this Quarterly Report on Form 10-Q, the terms "WSFS", "the Company", "registrant", "we", "us", and "our" mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Cash Connect is our registered trademark. Any other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.


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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
(Dollars in thousands, except per share data)
 
(Unaudited)
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
58,504

 
$
49,849

 
$
169,258

 
$
140,394

Interest on mortgage-backed securities
 
4,955

 
3,854

 
14,132

 
11,658

Interest and dividends on investment securities:
 
 
 
 
 
 
 
 
Taxable
 
14

 
80

 
137

 
242

Tax-exempt
 
1,125

 
1,134

 
3,387

 
3,418

Other interest income
 
412

 
420

 
1,256

 
1,174

 
 
65,010

 
55,337

 
188,170

 
156,886

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits
 
3,862

 
2,412

 
10,278

 
6,734

Interest on senior debt
 
1,807

 
2,119

 
6,049

 
4,236

Interest on Federal Home Loan Bank advances
 
2,402

 
1,225

 
6,057

 
3,397

Interest on federal funds purchased and securities sold under agreements to repurchase
 
273

 
113

 
709

 
457

Interest on trust preferred borrowings
 
500

 
415

 
1,418

 
1,183

Interest on other borrowings
 
37

 
32

 
113

 
88

 
 
8,881

 
6,316

 
24,624

 
16,095

Net interest income
 
56,129

 
49,021

 
163,546

 
140,791

Provision for loan losses
 
2,896

 
5,828

 
6,901

 
7,862

Net interest income after provision for loan losses
 
53,233

 
43,193

 
156,645

 
132,929

Noninterest income:
 
 
 
 
 
 
 
 
Credit/debit card and ATM income
 
9,350

 
7,776

 
26,406

 
21,930

Investment management and fiduciary income
 
8,809

 
6,074

 
25,683

 
17,610

Deposit service charges
 
4,695

 
4,482

 
13,652

 
13,100

Mortgage banking activities, net
 
1,756

 
2,555

 
4,785

 
6,025

Securities gains, net
 
736

 
1,040

 
1,764

 
1,890

Loan fee income
 
483

 
542

 
1,483

 
1,499

Bank owned life insurance income
 
546

 
255

 
1,124

 
697

Other income
 
6,066

 
4,862

 
17,312

 
14,011

 
 
32,441

 
27,586

 
92,209

 
76,762

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries, benefits and other compensation
 
29,172

 
24,804

 
86,231

 
71,189

Occupancy expense
 
4,756

 
4,335

 
14,602

 
12,560

Equipment expense
 
2,922

 
2,653

 
9,544

 
7,642

Professional fees
 
2,248

 
1,554

 
6,552

 
6,891

Data processing and operations expenses
 
1,817

 
1,500

 
5,185

 
4,564

Marketing expense
 
712

 
712

 
2,268

 
2,177

Loan workout and OREO expenses
 
484

 
511

 
1,504

 
1,059

FDIC expenses
 
560

 
469

 
1,683

 
2,080

Early extinguishment of debt

 
695

 

 
695

 

Corporate development expense
 
153

 
5,885

 
857

 
7,003

Other operating expense
 
10,644

 
8,811

 
29,275

 
24,552

 
 
54,163

 
51,234

 
158,396

 
139,717

Income before taxes
 
31,511

 
19,545

 
90,458

 
69,974

Income tax provision
 
10,942

 
6,823

 
30,382

 
24,004

Net income
 
$
20,569

 
$
12,722

 
$
60,076

 
$
45,970

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.65

 
$
0.42

 
$
1.91

 
$
1.54

Diluted
 
$
0.64

 
$
0.41

 
$
1.86

 
$
1.50

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
 
(Unaudited)
Net Income
 
$
20,569

 
$
12,722

 
$
60,076

 
$
45,970

Other comprehensive income:
 
 
 
 
 
 
 
 
Net change in unrealized gains on investment securities available for sale
 
 
 
 
 
 
 
 
Net unrealized gains (loss) arising during the period, net of tax expense (benefit) of $761, ($682), $3,498 and $8,668, respectively
 
1,289

 
(1,112
)
 
5,802

 
14,143

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $261, $395, $628 and $718, respectively
 
(475
)
 
(645
)
 
(1,136
)
 
(1,172
)
 
 
814

 
(1,757
)
 
4,666

 
12,971

Net change in securities held to maturity
 
 
 
 
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $60, $60, $181 and $187, respectively
 
(99
)
 
(102
)
 
(297
)
 
(305
)
Net change in unfunded pension liability
 
 
 
 
 
 
 
 
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($15), ($14), ($42) and $266, respectively
 
(22
)
 
(20
)
 
(67
)
 
436

Net change in cash flow hedge
 
 
 
 
 
 
 
 
Net unrealized gain arising during the period, net of tax expense of $26, $38, $118 and $38, respectively
 
42

 
61

 
192

 
61

Total other comprehensive income (loss)
 
735

 
(1,818
)
 
4,494

 
13,163

Total comprehensive income
 
$
21,304

 
$
10,904

 
$
64,570

 
$
59,133

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
September 30, 2017
 
December 31, 2016
(Dollars in thousands, except per share and share data)
 
(Unaudited)
Assets:
 
 
 
 
Cash and due from banks
 
$
117,343

 
$
119,929

Cash in non-owned ATMs
 
612,443

 
698,454

Interest-bearing deposits in other banks including collateral of $3,380 at September 30, 2017 and December 31, 2016
 
3,579

 
3,540

Total cash and cash equivalents
 
733,365

 
821,923

Investment securities, available for sale (amortized cost of $816,114 at September 30, 2017 and $807,761 at December 31, 2016)
 
810,433

 
794,543

Investment securities, held to maturity-at cost (fair value of $163,397 at September 30, 2017 and $163,232 at December 31, 2016)
 
161,721

 
164,346

Loans, held for sale at fair value
 
19,313

 
54,782

Loans, net of allowance for loan losses of $40,201 at September 30, 2017 and $39,751 at December 31, 2016
 
4,670,216

 
4,444,375

Bank owned life insurance
 
102,727

 
101,425

Stock in Federal Home Loan Bank of Pittsburgh-at cost
 
33,277

 
38,248

Other real estate owned
 
3,924

 
3,591

Accrued interest receivable
 
17,789

 
17,027

Premises and equipment
 
48,345

 
48,871

Goodwill
 
166,007

 
167,539

Intangible assets
 
23,109

 
23,708

Other assets
 
85,118

 
84,892

Total assets
 
$
6,875,344

 
$
6,765,270

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
1,357,597

 
$
1,266,306

Interest-bearing demand
 
1,057,571

 
935,333

Money market
 
1,347,576

 
1,257,520

Savings
 
557,914

 
547,293

Time
 
305,347

 
332,624

Jumbo certificates of deposit – customer
 
251,782

 
260,560

Total customer deposits
 
4,877,787

 
4,599,636

Brokered deposits
 
173,932

 
138,802

Total deposits
 
5,051,719

 
4,738,438

Federal funds purchased and securities sold under agreements to repurchase
 
70,000

 
130,000

Federal Home Loan Bank advances
 
697,812

 
854,236

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
98,116

 
152,050

Other borrowed funds
 
70,369

 
64,150

Accrued interest payable
 
3,882

 
1,151

Other liabilities
 
75,574

 
70,898

Total liabilities
 
6,134,483

 
6,077,934

Stockholders’ Equity:
 
 
 
 
Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,217,643 at September 30, 2017 and 55,995,219 at December 31, 2016
 
562

 
580

Capital in excess of par value
 
334,221

 
329,457

Accumulated other comprehensive loss
 
(3,123
)
 
(7,617
)
Retained earnings
 
680,554

 
627,078

Treasury stock at cost, 24,807,145 shares at September 30, 2017 and 24,605,145 shares at December 31, 2016
 
(271,353
)
 
(262,162
)
Total stockholders’ equity
 
740,861

 
687,336

Total liabilities and stockholders’ equity
 
$
6,875,344

 
$
6,765,270

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share and share amounts)
 
Shares
 
Common Stock
 
Capital in Excess of Par Value
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Stockholders' Equity
Balance, December 31, 2015
 
55,945,245

 
$
560

 
$
256,435

 
$
696

 
$
570,630

 
$
(247,850
)
 
$
580,471

Net Income
 

 

 

 

 
45,970

 

 
45,970

Other comprehensive income
 

 

 

 
13,163

 

 

 
13,163

Cash dividend, $0.18 per share
 

 

 

 

 
(5,437
)
 

 
(5,437
)
Issuance of common stock including proceeds from exercise of common stock options
 
174,211

 
2

 
1,888

 

 

 

 
1,890

Stock-based compensation expense
 

 

 
2,066

 

 

 

 
2,066

Acquisition of Penn Liberty
 
1,806,748

 
18

 
66,759

 

 

 

 
66,777

Repurchase of common stock, 409,371 shares
 

 

 

 

 

 
(12,890
)
 
(12,890
)
Treasury share adjustment (1)
 
(2,022,627
)
 


 

 

 

 

 

Balance, September 30, 2016
 
55,903,577

 
$
580

 
$
327,148

 
$
13,859

 
$
611,163

 
$
(260,740
)
 
$
692,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
55,995,219

 
$
580

 
$
329,457

 
$
(7,617
)
 
$
627,078

 
$
(262,162
)
 
$
687,336

Net Income
 

 

 

 

 
60,076

 

 
60,076

Other comprehensive income
 

 

 

 
4,494

 

 

 
4,494

Cash dividend, $0.21 per share
 

 

 

 

 
(6,600
)
 

 
(6,600
)
Issuance of common stock including proceeds from exercise of common stock options
 
222,424

 
2

 
2,315

 

 

 

 
2,317

Stock-based compensation expense
 

 

 
2,449

 

 

 

 
2,449

Repurchase of common stock, 204,000 shares
 

 
(20
)
 

 

 

 
(9,191
)
 
(9,211
)
Balance, September 30, 2017
 
56,217,643

 
$
562

 
$
334,221

 
$
(3,123
)
 
$
680,554

 
$
(271,353
)
 
$
740,861


(1)
The 2016 Consolidated Statement of Changes in Stockholder's Equity has been revised to reflect an adjustment between shares issued and treasury stock. This reclassification had no impact on shares outstanding, earnings per share or retained earnings.


The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.



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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net Income
 
$
60,076

 
$
45,970

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
6,901

 
7,862

Depreciation of premises and equipment, net
 
6,454

 
5,587

Amortization of fees and discounts, net
 
15,002

 
13,921

Amortization of intangible assets
 
2,352

 
1,260

Gain on mortgage banking activities, net
 
(4,785
)
 
(6,025
)
Gain on sale of securities, net
 
(1,764
)
 
(1,890
)
Loss on sale of other real estate owned and valuation adjustments, net
 
187

 
230

Debt extinguishment cost
 
695

 

Deferred income tax expense
 
3,097

 
5,364

Increase in accrued interest receivable
 
(762
)
 
(239
)
(Increase) decrease in other assets
 
(7,451
)
 
8,028

Origination of loans held for sale
 
(258,962
)
 
(252,368
)
Proceeds from sales of loans held for sale
 
284,797

 
230,864

Stock-based compensation expense
 
2,449

 
2,253

Increase in accrued interest payable
 
2,731

 
2,857

Increase (decrease) in other liabilities
 
962

 
(2,286
)
Increase in value of bank owned life insurance
 
(899
)
 
(2,311
)
Increase in capitalized interest, net
 
(3,252
)
 
(3,834
)
Net cash provided by operating activities
 
$
107,828

 
$
55,243

Investing activities:
 
 
 
 
Purchases of investment securities held to maturity
 
$

 
$
(3,329
)
Repayments, maturities and calls of investment securities held to maturity
 
1,175

 
2,840

Sale of investment securities available for sale
 
415,486

 
155,789

Purchases of investment securities available for sale
 
(593,878
)
 
(254,993
)
Repayments of investment securities available for sale
 
174,251

 
62,798

Proceeds of bank owned life insurance death benefit
 
371

 

Net increase in loans
 
(231,955
)
 
(141,500
)
Net cash for business combinations
 

 
51,788

Purchases of stock of Federal Home Loan Bank of Pittsburgh
 
(128,159
)
 
(57,308
)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh
 
133,130

 
51,117

Sales of other real estate owned
 
4,405

 
4,069

Investment in premises and equipment
 
(7,336
)
 
(7,677
)
Sales of premises and equipment
 
1,593

 

Net cash used for investing activities
 
$
(230,917
)
 
$
(136,406
)

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Nine Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Financing activities:
 
 
 
 
Net increase in demand and saving deposits
 
$
320,784

 
$
221,336

Decrease in time deposits
 
(36,055
)
 
(57,383
)
Increase (decrease) in brokered deposits
 
35,079

 
(12,091
)
Decrease in loan payable
 
(359
)
 
(366
)
Receipts from FHLB advances
 
109,432,123

 
90,314,153

Repayments of FHLB advances
 
(109,588,547
)
 
(90,166,500
)
Receipts from federal funds purchased and securities sold under agreement to repurchase
 
17,610,000

 
21,676,620

Repayments of federal funds purchased and securities sold under agreement to repurchase
 
(17,670,000
)
 
(21,723,820
)
Dividends paid
 
(6,600
)
 
(5,437
)
Issuance of common stock and exercise of common stock options
 
2,317

 
1,918

Redemption of senior debt
 
(55,000
)
 

Issuance of senior debt
 

 
97,849

Purchase of treasury stock
 
(9,211
)
 
(12,890
)
Net cash provided by financing activities
 
$
34,531

 
$
333,389

(Decrease) increase in cash and cash equivalents
 
(88,558
)
 
252,226

Cash and cash equivalents at beginning of period
 
821,923

 
561,179

Cash and cash equivalents at end of period
 
$
733,365

 
$
813,405

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid during the year for:
 
 
 
 
     Interest
 
$
21,893

 
$
13,238

     Income taxes
 
20,861

 
18,640

Non-cash information:
 
 
 
 
Loans transferred to other real estate owned
 
4,925

 
1,455

Loans transferred to portfolio from held-for-sale at fair value
 
12,782

 
6,337

Net change in accumulated other comprehensive income
 
4,494

 
13,163

Fair value of assets acquired, net of cash received
 

 
526,767

Fair value of liabilities assumed
 

 
583,517

Goodwill adjustments, net
 
(1,532
)
 
(1,496
)
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

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WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
(UNAUDITED)
1. BASIS OF PRESENTATION
General
Our unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (the Company or WSFS), Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress) and Christiana Trust Company of Delaware (Christiana Trust DE). We also have one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has three wholly-owned subsidiaries: WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC.
Overview
Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers. The Federal Deposit Insurance Corporation (FDIC) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.
In preparing the unaudited Consolidated Financial Statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Amounts subject to significant estimates include the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, other-than-temporary impairment (OTTI), and the income tax valuation allowance. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.
Our accounting and reporting policies conform to Generally Accepted Accounting Principles (GAAP) in the U.S., prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2017. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Annual Report on Form 10-K") that was filed with the SEC on March 1, 2017 and is available at www.sec.gov or on our website at http://investors.wsfsbank.com/financials.cfm. All significant intercompany transactions were eliminated in consolidation.
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2016 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those disclosed in our 2016 Annual Report on Form 10-K.
Senior Debt
On September 1, 2017, we redeemed $55.0 million in aggregate principal amount of our 6.25% senior notes due 2019 which were issued in 2012 (the 2012 senior notes). The 2012 senior notes were repaid using a portion of the proceeds from our 2016 issuance of senior unsecured fixed-to-floating rate notes (the 2016 senior notes) described below. We recorded noninterest expense of $0.7 million due to the write-off of unamortized debt issuance costs in connection with this redemption.
On June 13, 2016, the Company issued $100.0 million of the 2016 senior notes. The 2016 senior notes mature on June 15, 2026 and have a fixed coupon rate of 4.50% from issuance until June 15, 2021 and a variable coupon rate of three month LIBOR plus 3.30% from June 15, 2021 until maturity. The 2016 senior notes may be redeemed beginning on June 15, 2021 at 100% of principal plus accrued and unpaid interest. The net proceeds from the issuance of the 2016 senior notes are being used for general corporate purposes.

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Acquisitions in 2016
On August 12, 2016, we completed the acquisition of Penn Liberty Financial Corp. (Penn Liberty), a community bank headquartered in Wayne, Pennsylvania in order to build our market share, deepen our presence in the southeastern Pennsylvania market, and enhance our customer base. The results of Penn Liberty’s operations are included in our Consolidated Financial Statements since the date of the acquisition. See Note 2 – Business Combinations for further information.
During the third and fourth quarters of 2016, respectively, we acquired the assets of Powdermill Financial Solutions LLC, a multi-family office serving an affluent clientele in the local community and throughout the U.S., and West Capital Management, Inc., an independent, fee-only wealth management firm providing fully customized solutions tailored to the unique needs of institutions and high-net-worth individuals which operates under a multi-family office philosophy. These acquisitions align with our strategic plan to expand our wealth management offerings and to diversify our fee-income generating businesses.
Correction of Prior Period Balances
Consolidated Statements of Income: The Consolidated Statements of Income for the three and nine months ended September 30, 2016 have been revised to correct an immaterial error in Noninterest income - Other income and Noninterest expense - Other operating expense related to revenue earned for cash servicing fees. As a result, the Consolidated Statements of Income have been revised to reflect these changes, as follows:
 
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
(Dollars in thousands)
 
As originally reported
 
Adjustments
 
As revised
 
As originally reported
 
Adjustments
 
As revised
Noninterest income - Other income
 
$
4,125

 
$
737

 
$
4,862

 
$
12,017

 
$
1,994

 
$
14,011

Noninterest expense - Other operating expense
 
8,074

 
737

 
8,811

 
22,558

 
1,994

 
24,552

The above revisions had no effect on earnings per share or retained earnings. Periods not presented herein will be revised, as applicable, as they are included in future filings.

RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2017
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-05: Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which amends Accounting Standards Codification (ASC) Topic 815: Derivatives and Hedging. This new guidance clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, cause a hedge accounting relationship to be discontinued because it does not represent a termination of the original derivative instrument or a change in the critical terms of the hedge relationship. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. Early adoption is permitted, including adoption in an interim period. The Company adopted this accounting guidance during the quarter ended March 31, 2017 on a prospective basis with no impact to our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, Derivatives and Hedging (Topic 815). ASU 2016-06 clarifies that determining whether the economic characteristics of a put or call are clearly and closely related to its debt host requires only an assessment of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-24. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. The standard is effective for public business entities in interim and annual periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim period for which the entity’s financial statements have not been issued, but would be retroactively applied to the beginning of the year that includes the interim period. The standard requires a modified retrospective transition approach, with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. For instruments that are eligible for the fair value option, an entity has a one-time option to irrevocably elect to measure the debt instrument affected by the standard in its entirety at fair value with changes in fair value recognized in earnings. The Company adopted this accounting guidance during the quarter ended March 31, 2017 with no impact on our Consolidated Statements of Income or Consolidated Statements of Financial Condition.

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In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, Investments - Equity Method and Joint Ventures (Topic 323). ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The standard is effective for all entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date. The Company adopted this accounting guidance during the quarter ended March 31, 2017 on a prospective basis with no impact to our Consolidated Financial Statements.
Accounting Guidance Pending Adoption at September 30, 2017

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Gross versus Net), which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers and 2016-12, Narrow-Scope Improvements and Practical Expedients, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates are effective for public business entities in annual and interim reporting periods in fiscal years beginning after December 15, 2017. Early application is permitted for all entities, but not before annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Company will adopt the standard on January 1, 2018 using the retrospective with the cumulative effect transition method. For revenue streams determined to be within the scope of the standard, we have substantially completed our impact analysis, the results of which has shown an immaterial effect on our Consolidated Financial Statements. The Company is in the process of updating our accounting policies, processes and related internal controls to incorporate the changes from the standard. Topic 606 also includes expanded disclosure requirements which we are currently in the process of drafting. Although the impact of this adoption is expected to be immaterial on our financial statements, we do anticipate adding additional detail to our revenue disclosures.
 
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Company will adopt the standard on a prospective basis and does not expect the prospective application of this guidance to have a material impact on its Consolidated Financial Statements.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company does not plan to early adopt this guidance and is currently in the process of identifying our complete lease population as defined by this guidance. The Company is also evaluating our internal systems, accounting policies, processes and related internal controls for potential impacts. Our preliminary review of this guidance suggests that adoption will result in additional assets and liabilities on our Consolidated Balance Sheet. The Company will adopt this guidance on January 1, 2019.
 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not plan to early adopt this guidance and is in the early stages of evaluating the impact of this guidance on its Consolidated Financial Statements, internal systems, accounting policies, processes and related internal controls. Our preliminary review of this guidance suggests that adoption may materially increase the allowance for loan losses and decrease capital levels; however, the extent of these impacts will depend on the asset quality of the portfolio and significant estimates and judgments made by management at the time of adoption. The Company will adopt this guidance on January 1, 2020.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 represents the Emerging Issues Task Force’s final consensus on eight issues related to the classification of cash payments and receipts in the statement of cash flows for a number of common transactions. The consensus also clarifies when identifiable cash flows should be separated versus classified based on their predominant source or use. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the application of this guidance to have any impact on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a new, two-step framework for determining whether a transaction is accounted for as an acquisition (or disposal) of assets or a business. The first step is evaluating whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the transaction is not considered a business. Also, in order to be considered a business, the transaction would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or been made available for issuance. The Company does not expect the application of this guidance to have any impact on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill impairment by removing the hypothetical purchase price allocation. The new guidance requires an impairment of goodwill be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, up to the amount of goodwill recorded. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides clarification of the scope of ASC 610-20. Specifically, the new guidance clarifies that ASC 610-20 applies to nonfinancial assets which do not meet the definition of a business or not-for-profit activity. Further, the new guidance clarifies that a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset which is defined as a financial asset promised to a counterparty in a contract where substantially all of the assets promised are nonfinancial. Finally, the new guidance clarifies that each distinct nonfinancial asset and in-substance nonfinancial asset should be derecognized when the counterparty obtains control of it. The guidance is effective for public entities in annual and interim reporting periods in fiscal years beginning after December 15, 2017. Early application is permitted for all entities, but not before annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting ASU 2017-05 on its Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires that the service cost component of net periodic pension cost be disclosed with other compensation costs in the income statement. For all other cost components, an entity must either separately disclose the other cost components in separate line item(s) outside a subtotal of income from operations in the income statement or disclose the line item(s) used to present the other cost components in the income statement. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

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In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The new guidance requires the amortization period for certain non-contingent callable debt securities held at a premium to end at the earliest call date of the debt security. If the call option is not exercised at the earliest call date, the guidance requires the debt security's effective yield to be reset based on the contractual payment terms of the debt security. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Use of the modified retrospective method, with a cumulative-effect adjustment to retained earnings, is required. In the period of adoption, a change in accounting principle disclosure is required. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting. The new guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the award’s fair value, vesting conditions and classification remain the same immediately before and after the change, modification accounting is not applied. Additionally, the guidance does not require valuation before or after the change if the change does not affect any of the inputs to the model used to value the award. The guidance is effective for all entities in annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The new guidance will be applied on a prospective basis to awards modified on or after the adoption date. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new guidance changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Specifically, the guidance eliminates the requirement to separately measure and report hedge ineffectiveness and also aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the new guidance provides entities the ability to apply hedge accounting to additional hedging strategies. The guidance is effective for all entities in annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.


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2. BUSINESS COMBINATIONS
Penn Liberty Financial Corporation
On August 12, 2016, we completed the acquisition of Penn Liberty. The acquisition of Penn Liberty was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The fair values of assets acquired and liabilities assumed are now considered final.
In connection with the acquisition of Penn Liberty, the consideration transferred and the fair value of identifiable assets acquired and liabilities assumed, including remeasurement adjustments subsequent to the date of acquisition, are summarized in the following table:
 
(Dollars in thousands)
 
Fair Value
Consideration Transferred:
 
 
Common shares issued (1,806,748)
 
$
68,352

Cash paid to Penn Liberty stock and option holders
 
40,549

Value of consideration
 
108,901

Assets acquired:
 
 
Cash and due from banks
 
102,301

Investment securities
 
627

Loans
 
483,203

Premises and equipment
 
6,817

Deferred income taxes
 
6,542

Bank owned life insurance
 
8,666

Core deposit intangible
 
2,882

Other real estate owned
 
996

Other assets
 
12,085

Total assets
 
624,119

Liabilities assumed:
 
 
Deposits
 
568,706

Other borrowings
 
10,000

Other liabilities
 
3,738

Total liabilities
 
582,444

Net assets acquired:
 
41,675

Goodwill resulting from acquisition of Penn Liberty
 
$
67,226

The following table details the change to goodwill recorded subsequent to acquisition:
(Dollars in thousands)
 
Fair Value
Goodwill resulting from the acquisition of Penn Liberty reported as of December 31, 2016
 
$
68,814

Effects of adjustments to:
 
 
Deferred income taxes
 
880

Loans
 
279

Other assets
 
(1,440
)
Other liabilities
 
(1,307
)
Adjusted goodwill resulting from the acquisition of Penn Liberty as of September 30, 2017
 
$
67,226

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. During the three months ended September 30, 2017, no adjustments were made to goodwill resulting from the acquisition of Penn Liberty.

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3. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars and Shares in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
20,569

 
$
12,722

 
$
60,076

 
$
45,970

Denominator:
 
 
 
 
 
 
 
Weighted average basic shares
31,420

 
30,520

 
31,424

 
29,914

Dilutive potential common shares
848

 
797

 
856

 
747

Weighted average fully diluted shares
32,268

 
31,317

 
32,280

 
30,661

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.65

 
$
0.42

 
$
1.91

 
$
1.54

Diluted
$
0.64

 
$
0.41

 
$
1.86

 
$
1.50

Outstanding common stock equivalents having no dilutive effect

 
1

 
5

 
10



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4. INVESTMENT SECURITIES
The following tables detail the amortized cost and the estimated fair value of our available-for-sale and held-to-maturity investment securities. None of our investment securities are classified as trading.
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
CMO
 
$
269,267

 
$
895

 
$
2,354

 
$
267,808

FNMA MBS
 
434,920

 
1,545

 
5,223

 
431,242

FHLMC MBS
 
85,564

 
277

 
779

 
85,062

GNMA MBS
 
25,723

 
289

 
315

 
25,697

Other investments
 
640

 

 
16

 
624

 
 
$
816,114

 
$
3,006

 
$
8,687

 
$
810,433

December 31, 2016
 
 
 
 
 
 
 
 
GSE
 
$
35,061

 
$
9

 
$
60

 
$
35,010

CMO
 
264,607

 
566

 
3,957

 
261,216

FNMA MBS
 
414,218

 
950

 
9,404

 
405,764

FHLMC MBS
 
64,709

 
135

 
1,330

 
63,514

GNMA MBS
 
28,540

 
303

 
427

 
28,416

Other investments
 
626

 

 
3

 
623

 
 
$
807,761

 
$
1,963

 
$
15,181

 
$
794,543

(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Held-to-Maturity Securities(1)
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
161,721

 
$
1,796

 
$
120

 
$
163,397

December 31, 2016
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
164,346

 
$
271

 
$
1,385

 
$
163,232

(1) 
Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $1.8 million and $2.2 million at September 30, 2017 and December 31, 2016, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.


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The scheduled maturities of investment securities available for sale and held to maturity at September 30, 2017 and December 31, 2016 are presented in the table below:
 
 
 
Available for Sale (1)
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
September 30, 2017
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
4,007

 
4,002

After five years but within ten years
 
201,919

 
198,334

After ten years
 
609,548

 
607,473

 
 
$
815,474

 
$
809,809

December 31, 2016
 
 
 
 
Within one year
 
$
16,009

 
$
16,017

After one year but within five years
 
19,052

 
18,992

After five years but within ten years
 
276,635

 
270,300

After ten years
 
495,439

 
488,611

 
 
$
807,135

 
$
793,920

 
 
 
 
 
 
 
Held to Maturity
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
September 30, 2017
 
 
 
 
Within one year
 
$
328

 
$
326

After one year but within five years
 
5,437

 
5,491

After five years but within ten years
 
15,672

 
15,838

After ten years
 
140,284

 
141,742

 
 
$
161,721

 
$
163,397

December 31, 2016
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
6,168

 
6,162

After five years but within ten years
 
8,882

 
8,870

After ten years
 
149,296

 
148,200

 
 
$
164,346

 
$
163,232

(1) 
Included in the investment portfolio, but not in the table above, is a mutual fund with an amortized cost and fair value of $0.6 million and $0.6 million as of September 30, 2017 and December 31, 2016 which has no stated maturity.
Mortgage-backed securities (MBS) may have expected maturities that differ from their contractual maturities. These differences arise because borrowers have the right to call or prepay obligations with or without prepayment penalty.
Investment securities with fair market values aggregating $737.3 million and $562.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of September 30, 2017 and December 31, 2016, respectively.
During the nine months ended September 30, 2017, we sold $415.5 million of investment securities categorized as available for sale, resulting in realized gains of $1.9 million and realized losses of less than $0.1 million. During the nine months ended September 30, 2016, we sold $155.8 million of investment securities categorized as available for sale, resulting in realized gains of $1.9 million and no realized losses. The cost basis of all investment securities sales is based on the specific identification method.
As of September 30, 2017 and December 31, 2016, our investment securities portfolio had remaining unamortized premiums of $14.9 million and $18.0 million, respectively, and unaccreted discounts of $1.1 million and $0.4 million, respectively.


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For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at September 30, 2017.
 
 
 
Duration of Unrealized Loss Position
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
CMO
 
$
114,939

 
$
1,188

 
$
43,775

 
$
1,166

 
$
158,714

 
$
2,354

FNMA MBS
 
188,153

 
2,299

 
74,801

 
2,924

 
262,954

 
5,223

FHLMC MBS
 
45,317

 
497

 
7,892

 
282

 
53,209

 
779

GNMA MBS
 
4,856

 
83

 
10,687

 
232

 
15,543

 
315

Other investments
 

 

 
624

 
16

 
624

 
16

Total temporarily impaired investments
 
$
353,265

 
$
4,067

 
$
137,779

 
$
4,620

 
$
491,044

 
$
8,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
13,571

 
$
48

 
$
6,700

 
$
72

 
$
20,271

 
$
120

Total temporarily impaired investments
 
$
13,571

 
$
48

 
$
6,700

 
$
72

 
$
20,271

 
$
120

For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2016.
 
 
 
Duration of Unrealized Loss Position
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
GSE
 
$
21,996

 
$
60

 
$

 
$

 
$
21,996

 
$
60

CMO
 
160,572

 
3,867

 
4,654

 
90

 
165,226

 
3,957

FNMA MBS
 
50,878

 
1,330

 

 

 
50,878

 
1,330

FHLMC MBS
 
300,403

 
9,404

 

 

 
300,403

 
9,404

GNMA MBS
 
16,480

 
427

 

 

 
16,480

 
427

Other investments
 
623

 
3

 

 

 
623

 
3

Total temporarily impaired investments
 
$
550,952

 
$
15,091

 
$
4,654

 
$
90

 
$
555,606

 
$
15,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
112,642

 
$
1,374

 
$
695

 
$
11

 
$
113,337

 
$
1,385

Total temporarily impaired investments
 
$
112,642

 
$
1,374

 
$
695

 
$
11

 
$
113,337

 
$
1,385


19

Table of Contents

At September 30, 2017, we owned investment securities totaling $511.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $8.8 million at September 30, 2017. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Our investment portfolio is reviewed each quarter for indications of OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.
All securities, with the exception of one having a fair value of $0.8 million at September 30, 2017, were AA-rated or better at the time of purchase and remained investment grade at September 30, 2017. All securities were evaluated for OTTI at September 30, 2017 and December 31, 2016. The result of this evaluation showed no OTTI as of September 30, 2017 or December 31, 2016. The estimated weighted average duration of MBS was 5.10 years at September 30, 2017.


















20

Table of Contents


5. LOANS
The following table shows our loan portfolio by category:  
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Commercial and industrial
 
$
1,388,094

 
$
1,287,731

Owner-occupied commercial
 
1,096,753

 
1,078,162

Commercial mortgages
 
1,157,074

 
1,163,554

Construction
 
293,317

 
222,712

Residential (1)
 
262,147

 
289,611

Consumer
 
520,276

 
450,029

 
 
4,717,661

 
4,491,799

Less:
 
 
 
 
Deferred fees, net
 
7,244

 
7,673

Allowance for loan losses
 
40,201

 
39,751

Net loans
 
$
4,670,216

 
$
4,444,375

(1) Includes reverse mortgages, at fair value of $21.4 million at September 30, 2017 and $22.6 million at December 31, 2016.
The following table shows the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the Company applies ASC 310-30 as of the dates indicated:
 
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Outstanding principal balance
 
$
30,465

 
$
41,574

Carrying amount
 
24,039

 
33,104

Allowance for loan losses
 
542

 
510


The following table presents the changes in accretable yield on the acquired credit impaired loans for the nine months ended September 30, 2017:
(Dollars in thousands)
 
Nine months ended September 30, 2017
Balance at beginning of period
 
$
5,150

Accretion
 
(2,158
)
Reclassification from nonaccretable difference
 
1,246

Additions/adjustments
 
(1,089
)
Disposals
 
(345
)
Balance at end of period
 
$
2,804


21

Table of Contents

6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION
Allowance for Loan Losses
We maintain an allowance for loan losses which represents our best estimate of probable losses within our loan portfolio. As losses are realized, they are charged to this allowance. We established our allowance in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102), Selected Loan Loss Allowance Methodology and Documentation Issues, ASC 450, Contingencies and ASC 310, Receivables. When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation of the allowance is assigned in accordance with ASC 310-10. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based on a continuing review of these portfolios. The following are included in our allowance for loan losses:
 
Specific reserves for impaired loans
An allowance for each pool of homogenous loans based on historical loss experience
Adjustments for qualitative and environmental factors allocated to pools of homogenous loans
When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the nine months ended September 30, 2017 and 2016, net charge-offs totaled $6.5 million or 0.19% of average loans annualized, and $5.9 million, or 0.20% of average loans annualized, respectively.
Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied commercial, commercial mortgages and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. The probability of default is calculated based on the historical rate of migration to impaired status during the last 27 quarters. During the nine months ended September 30, 2017, we increased the look-back period to 27 quarters from the 24 quarters used at December 31, 2016. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the core reserves calculated by the ALLL model are adequately considering the losses within a full credit cycle.
Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 27 quarter look-back period.
Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration:
 
Current underwriting policies, staff, and portfolio mix,
Internal trends of delinquency, nonaccrual and criticized loans by segment,
Risk rating accuracy, control and regulatory assessments/environment,
General economic conditions - locally and nationally,
Market trends impacting collateral values, and
The competitive environment, as it could impact loan structure and underwriting.
The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves.
The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 9 quarters as of September 30, 2017. Our residential mortgage and consumer LEP remained at 4 quarters as of September 30, 2017. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP annually for our commercial portfolio and review the current 4 quarter LEP for the retail portfolio to determine the continued reasonableness of this assumption.

22

Table of Contents

In prior periods, we had a component of the allowance for model estimation and complexity risk reserve. During the second quarter of 2016 as a result of continued refinement of the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance for loan losses.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.
The following tables provide the activity of our allowance for loan losses and loan balances for the three and nine months ended September 30, 2017:
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Total
Three months ended September 30, 2017
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
14,224

 
$
5,816

 
$
7,335

 
$
3,432

 
$
2,050

 
$
7,148

 
$
40,005

Charge-offs
 
(1,603
)
 
(104
)
 
(1,196
)
 
(215
)
 
(59
)
 
(575
)
 
(3,752
)
Recoveries
 
417

 
12

 
16

 
301

 
11

 
295

 
1,052

Provision (credit)
 
2,128

 
(96
)
 
(231
)
 
427

 
(49
)
 
644

 
2,823

Provision for acquired loans
 
(7
)
 
104

 
(5
)
 
(28
)
 
9

 

 
73

Ending balance
 
$
15,159

 
$
5,732

 
$
5,919

 
$
3,917

 
$
1,962

 
$
7,512

 
$
40,201

Nine months ended September 30, 2017
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
13,339

 
$
6,588

 
$
8,915

 
$
2,838

 
$
2,059

 
$
6,012

 
$
39,751

Charge-offs
 
(3,787
)
 
(296
)
 
(1,702
)
 
(346
)
 
(112
)
 
(2,606
)
 
(8,849
)
Recoveries
 
820

 
120

 
69

 
305

 
141

 
943

 
2,398

Provision (credit)
 
4,597

 
(802
)
 
(1,602
)
 
1,056

 
(146
)
 
3,177

 
6,280

Provision for acquired loans
 
190

 
122

 
239

 
64

 
20

 
(14
)
 
621

Ending balance
 
$
15,159

 
$
5,732

 
$
5,919

 
$
3,917

 
$
1,962

 
$
7,512

 
$
40,201

Period-end allowance allocated to:
Loans individually evaluated for impairment
 
$
1,220

 
$

 
$
131

 
$

 
$
858

 
$
198

 
$
2,407

Loans collectively evaluated for impairment
 
13,646

 
5,699

 
5,638

 
3,881

 
1,078

 
7,310

 
37,252

Acquired loans evaluated for impairment
 
293

 
33

 
150

 
36

 
26

 
4

 
542

Ending balance
 
$
15,159

 
$
5,732

 
$
5,919

 
$
3,917

 
$
1,962

 
$
7,512

 
$
40,201

Period-end loan balances evaluated for:
Loans individually evaluated for impairment (2)
 
$
12,845

 
$
3,346

 
$
9,012

 
$
1,839

 
$
14,060

 
$
7,409

 
$
48,511

Loans collectively evaluated for impairment
 
1,249,027

 
941,296

 
943,699

 
271,447

 
148,715

 
472,488

 
4,026,672

Acquired nonimpaired loans
 
120,987

 
144,710

 
194,394

 
19,085

 
77,154

 
40,136

 
596,466

Acquired impaired loans
 
5,235

 
7,401

 
9,969

 
946

 
788

 
243

 
24,582

Ending balance (3)
 
$
1,388,094

 
$
1,096,753

 
$
1,157,074

 
$
293,317

 
$
240,717

 
$
520,276

 
$
4,696,231

(1) 
Period-end loan balance excludes reverse mortgages, at fair value of $21.4 million.
(2) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $14.9 million for the period ending September 30, 2017. Accruing troubled debt restructured loans are considered impaired loans.
(3) 
Ending loan balances do not include net deferred fees.





23

Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three and nine months ended September 30, 2016:
(Dollars in thousands)
 
Commercial
 
Owner -
occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Complexity Risk(2)
 
Total
Three months ended September 30, 2016
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
11,402

 
$
6,723

 
$
8,135

 
$
3,308

 
$
2,352

 
$
5,826

 
$

 
$
37,746

Charge-offs
 
(3,737
)
 
(1,415
)
 
(1
)
 
(30
)
 
(43
)
 
(518
)
 

 
(5,744
)
Recoveries
 
223

 
15

 
197

 
440

 
33

 
290

 

 
1,198

Provision (credit)
 
3,714

 
1,437

 
1,089

 
(824
)
 
(179
)
 
401

 

 
5,638

Provision for acquired loans
 
117

 
185

 
(48
)
 
(76
)
 
12

 

 

 
190

Ending balance
 
$
11,719

 
$
6,945

 
$
9,372

 
$
2,818

 
$
2,175

 
$
5,999

 
$

 
$
39,028

Nine months ended September 30, 2016
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
11,156

 
$
6,670

 
$
6,487

 
$
3,521

 
$
2,281

 
$
5,964

 
$
1,010

 
$
37,089

Charge-offs
 
(4,643
)
 
(1,556
)
 
(79
)
 
(59
)
 
(72
)
 
(1,967
)
 

 
(8,376
)
Recoveries
 
557

 
66

 
310

 
486

 
112

 
922

 

 
2,453

Provision (credit)
 
4,551

 
1,564

 
2,650

 
(1,104
)
 
(177
)
 
1,118

 
(1,010
)
 
7,592

Provision for acquired loans
 
98

 
201

 
4

 
(26
)
 
31

 
(38
)
 

 
270

Ending balance
 
$
11,719

 
$
6,945

 
$
9,372

 
$
2,818

 
$
2,175

 
$
5,999

 
$

 
$
39,028

Period-end allowance allocated to:
Loans individually evaluated for impairment
 
$
692

 
$

 
$
1,264

 
$
215

 
$
989

 
$
201

 
$

 
$
3,361

Loans collectively evaluated for impairment
 
10,974

 
6,923

 
7,982

 
2,549

 
1,167

 
5,798

 

 
35,393

Acquired loans evaluated for impairment
 
53

 
22

 
126

 
54

 
19

 

 

 
274

Ending balance
 
$
11,719

 
$
6,945

 
$
9,372

 
$
2,818

 
$
2,175

 
$
5,999

 
$

 
$
39,028

Period-end loan balances:
Loans individually evaluated for impairment (3)
 
$
4,198

 
$
2,510

 
$
7,165

 
$
1,419

 
$
13,957

 
$
8,105

 
$

 
$
37,354

Loans collectively evaluated for impairment
 
1,077,258

 
869,051

 
904,328

 
182,338

 
150,318

 
368,428

 

 
3,551,721

Acquired nonimpaired loans
 
175,570

 
175,411

 
229,530

 
21,627

 
103,537

 
61,257

 

 
766,932

Acquired impaired loans
 
9,691

 
10,673

 
12,880

 
3,592

 
899

 
368

 

 
38,103

Ending balance (4)
 
$
1,266,717

 
$
1,057,645

 
$
1,153,903

 
$
208,976

 
$
268,711

 
$
438,158

 
$

 
$
4,394,110

 
(1) 
Period-end loan balance excludes reverse mortgages, at fair value of $23.1 million.
(2) 
Represents the portion of the allowance for loan losses established to capture factors not already included in other components in our allowance for loan losses methodology.
(3) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $14.2 million for the period ending September 30, 2016. Accruing troubled debt restructured loans are considered impaired loans.
(4) 
Ending loan balances do not include net deferred fees.













Nonaccrual and Past Due Loans

24

Table of Contents

Nonaccruing loans are those on which the accrual of interest has ceased. Typically, we discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. 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 accretion of net deferred loan fees and amortization of net deferred loan costs 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 our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing 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 are in the process of collection.
The following tables show our nonaccrual and past due loans at the dates indicated:

 
 
September 30, 2017
(Dollars in thousands)
 
30–59 Days
Past Due 
and
Still 
Accruing
 
60–89 Days
Past Due and
Still 
Accruing
 
Greater 
Than
90 Days
Past Due and
Still Accruing
 
Total Past
Due
And Still
Accruing
 
Accruing
Current
Balances
 
Acquired
Impaired
Loans
 
Nonaccrual
Loans
 
Total
Loans
Commercial
 
$
673

 
$
136

 
$
685

 
$
1,494

 
$
1,368,660

 
$
5,235

 
$
12,705

 
$
1,388,094

Owner-occupied commercial
 
998

 

 

 
998

 
1,085,008

 
7,401

 
3,346

 
1,096,753

Commercial mortgages
 
1,320

 

 

 
1,320

 
1,136,982

 
9,969

 
8,803

 
1,157,074

Construction
 
1,033

 

 

 
1,033

 
289,499

 
946

 
1,839

 
293,317

Residential(1)
 
1,708

 
364

 
557

 
2,629

 
232,567

 
788

 
4,733

 
240,717

Consumer
 
593

 
771

 
96

 
1,460

 
516,463

 
243

 
2,110

 
520,276

Total (2)
 
$
6,325

 
$
1,271

 
$
1,338

 
$
8,934

 
$
4,629,179

 
$
24,582

 
$
33,536

 
$
4,696,231

% of Total Loans
 
0.13
%
 
0.03
%
 
0.03
%
 
0.19
%
 
98.58
%
 
0.52
%
 
0.71
%
 
100
%
(1) 
Residential accruing current balances excludes reverse mortgages at fair value of $21.4 million.
(2) 
The balances above include a total of $596.5 million of acquired nonimpaired loans.
 
 
December 31, 2016
(Dollars in thousands)
 
30–59 Days
Past Due 
and
Still 
Accruing
 
60–89 Days
Past Due 
and
Still 
Accruing
 
Greater 
Than
90 Days Past
Due and Still
Accruing
 
Total Past
Due And
Still
Accruing
 
Accruing
Current
Balances
 
Acquired
Impaired
Loans
 
Nonaccrual
Loans
 
Total
Loans
Commercial
 
$
1,507

 
$
278

 
$

 
$
1,785

 
$
1,277,748

 
$
6,183

 
$
2,015

 
$
1,287,731

Owner-occupied commercial
 
116

 
540

 

 
656

 
1,063,306

 
12,122

 
2,078

 
1,078,162

Commercial mortgages
 
167

 

 

 
167

 
1,143,180

 
10,386

 
9,821

 
1,163,554

Construction
 
132

 

 

 
132

 
218,886

 
3,694

 

 
222,712

Residential(1)
 
3,176

 
638

 
153

 
3,967

 
257,234

 
860

 
4,967

 
267,028

Consumer
 
392

 
346

 
285

 
1,023

 
444,642

 
369

 
3,995

 
450,029

Total(2)
 
$
5,490

 
$
1,802

 
$
438

 
$
7,730

 
$
4,404,996

 
$
33,614

 
$
22,876

 
$
4,469,216

% of Total Loans
 
0.12
%
 
0.04
%
 
0.01
%
 
0.17
%
 
98.57
%
 
0.75
%
 
0.51
%
 
100
%
(1) 
Residential accruing current balances excludes reverse mortgages, at fair value of $22.6 million.
(2) 
The balances above include a total of $724.1 million of acquired nonimpaired loans.










Impaired Loans

25

Table of Contents

Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and FASB ASC 310, Receivables (ASC 310). The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the fair value of collateral, if the loan is collateral dependent or (3) the loan’s observable market price. If the measure of the impaired loan is less than the recorded investment in the loan, a related allowance is allocated for the impairment.
The following tables provide an analysis of our impaired loans at September 30, 2017 and December 31, 2016:
 
 
 
September 30, 2017
(Dollars in thousands)
 
Ending
Loan
Balances
 
Loans with
No Related
Reserve (1)
 
Loans with
Related
Reserve
 
Related Reserve
 
Contractual
Principal Balances
 
Average Loan Balances
Commercial
 
$
14,814

 
$
3,129

 
$
11,685

 
$
1,513

 
$
16,967

 
$
11,981

Owner-occupied commercial
 
4,669

 
3,346

 
1,323

 
33

 
4,984

 
5,583

Commercial mortgages
 
12,190

 
7,267

 
4,923

 
281

 
18,385

 
12,941

Construction
 
2,111

 
1,839

 
272

 
36

 
2,377

 
3,769

Residential
 
14,621

 
8,343

 
6,278

 
884

 
17,517

 
14,652

Consumer
 
7,447

 
5,914

 
1,533

 
202

 
9,283

 
8,216

Total (2)
 
$
55,852

 
$
29,838

 
$
26,014

 
$
2,949

 
$
69,513

 
$
57,142

(1) 
Reflects loan balances at or written down to their remaining book balance.
(2) 
The above includes acquired impaired loans totaling $7.3 million in the ending loan balance and $8.3 million in the contractual principal balance of the total acquired impaired loan portfolio of $24.6 million
 
 
December 31, 2016
(Dollars in thousands)
 
Ending
Loan
Balances
 
Loans with
No Related
Reserve
 (1)
 
Loans with
Related
Reserve
 
Related
Reserve
 
Contractual
Principal
Balances
 
Average
Loan
Balances
Commercial
 
$
4,250

 
$
1,395

 
$
2,855

 
$
505

 
$
5,572

 
$
5,053

Owner-occupied commercial
 
4,650

 
2,078

 
2,572

 
15

 
5,129

 
3,339

Commercial mortgages
 
15,065

 
4,348

 
10,717

 
1,433

 
20,716

 
7,323

Construction
 
3,662

 

 
3,662

 
303

 
3,972

 
2,376

Residential
 
14,256

 
7,122

 
7,134

 
934

 
17,298

 
15,083

Consumer
 
8,021

 
6,561

 
1,460

 
215

 
11,978

 
7,910

Total (2)
 
$
49,904

 
$
21,504

 
$
28,400

 
$
3,405

 
$
64,665

 
$
41,084

(1) 
Reflects loan balances at or written down to their remaining book balance.
(2) 
The above includes acquired impaired loans totaling $12.8 million in the ending loan balance and $15.0 million in the contractual principal balance of the total acquired impaired loan portfolio of $33.6 million.
Interest income of $0.3 million and $1.0 million was recognized on impaired loans during the three and nine months ended September 30, 2017, respectively. Interest income of $0.5 million and $0.8 million was recognized on impaired loans during the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017, there were 32 residential loans and 3 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $3.3 million and $0.2 million, respectively. As of December 31, 2016, there were 29 residential loans and 7 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $3.7 million and $3.6 million, respectively.

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Reserves on Acquired Nonimpaired Loans
In accordance with FASB ASC 310, loans acquired by the Bank through its mergers with First National Bank of Wyoming, Alliance Bankcorp, Inc. (Alliance) and Penn Liberty are required to be reflected on the balance sheet at their fair values on the date of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance.
Credit Quality Indicators
Below is a description of each of our risk ratings for all commercial loans:
 
Pass. These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible
Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.
Substandard. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. A distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful. Borrowers have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.
Loss. Borrowers are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.
Residential and Consumer Loans
The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.

The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the Allowance for Loan Loss.















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Table of Contents

Commercial Credit Exposure
 
 
 
September 30, 2017
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Total
Commercial(1)
 
 
 
 
 
 
 
 
 
 
Amount
 
%
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
Special mention
 
$
12,474

 
$
2,858

 
$

 
$
3,644

 
$
18,976

 
 
Substandard:
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
52,237

 
25,083

 
64

 
754

 
78,138

 
 
Nonaccrual
 
11,485

 
3,346

 
8,672

 
1,839

 
25,342

 
 
Doubtful
 
1,220

 

 
131

 

 
1,351

 
 
Total Special Mention and Substandard
 
77,416

 
31,287

 
8,867

 
6,237

 
123,807

 
3
%
Acquired impaired
 
5,235

 
7,401

 
9,969

 
946

 
23,551

 
1
%
Pass
 
1,305,443

 
1,058,065

 
1,138,238

 
286,134

 
3,787,880

 
96
%
Total
 
$
1,388,094

 
$
1,096,753

 
$
1,157,074

 
$
293,317

 
$
3,935,238

 
100
%
(1) 
 Table includes $479.2 million of acquired nonimpaired loans as of September 30, 2017.

 
 
December 31, 2016
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Total
Commercial(1)
 
 
 
 
 
 
 
 
 
 
Amount
 
%
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
Special mention
 
$
17,630

 
$
11,419

 
$
34,198

 
$

 
$
63,247

 
 
Substandard:
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
45,067

 
19,871

 
239

 
2,193

 
67,370

 
 
Nonaccrual
 
1,693

 
2,078

 
8,574

 

 
12,345

 
 
Doubtful
 
322

 

 
1,247

 

 
1,569

 
 
Total Special Mention and Substandard
 
64,712

 
33,368

 
44,258

 
2,193

 
144,531

 
4
%
Acquired impaired
 
6,183

 
12,122

 
10,386

 
3,694

 
32,385

 
1
%
Pass
 
1,216,836

 
1,032,672

 
1,108,910

 
216,825

 
3,575,243

 
95
%
Total
 
$
1,287,731

 
$
1,078,162

 
$
1,163,554

 
$
222,712

 
$
3,752,159

 
100
%
(1) 
Table includes $573.5 million of acquired nonimpaired loans as of December 31, 2016.
Residential and Consumer Credit Exposure
 
(Dollars in thousands)
 
Residential(2)
 
Consumer
 
Total Residential and Consumer(3)
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30, 2017
 
December 31, 2016
 
 
2017
 
2016
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Nonperforming(1)
 
$
14,060

 
$
13,547

 
$
7,409

 
$
7,863

 
$
21,469

 
3
%
 
$
21,410

 
3
%
Acquired impaired loans
 
788

 
860

 
243

 
369

 
1,031

 
%
 
1,229

 
%
Performing
 
225,869

 
252,621

 
512,624

 
441,797

 
738,493

 
97
%
 
694,418

 
97
%
Total
 
$
240,717

 
$
267,028

 
$
520,276

 
$
450,029

 
$
760,993

 
100
%
 
$
717,057

 
100
%
(1) 
Includes $14.6 million as of September 30, 2017 and $12.4 million as of December 31, 2016 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest.
(2) 
Residential performing loans excludes $21.4 million and $22.6 million of reverse mortgages at fair value as of September 30, 2017 and December 31, 2016, respectively.
(3) 
Total includes $117.3 million and $150.5 million in acquired nonimpaired loans as of September 30, 2017 and December 31, 2016, respectively.
Troubled Debt Restructurings (TDRs)
TDRs are recorded in accordance with FASB ASC 310-40, Troubled Debt Restructuring by Creditors (ASC 310-40)

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The following table presents the balance of TDRs as of the indicated dates:
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Performing TDRs
 
$
14,905

 
$
14,336

Nonperforming TDRs
 
11,114

 
8,451

Total TDRs
 
$
26,019

 
$
22,787

Approximately $1.1 million and $1.3 million in related reserves have been established for these loans at September 30, 2017 and December 31, 2016, respectively.
The following table presents information regarding the types of loan modifications made for the nine months ended September 30, 2017:
 
 
Contractual payment reduction and term extension
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other (1)
 
Total
Commercial
 
1

 
1

 

 

 
2

Owner-occupied commercial
 

 
1

 

 

 
1

Construction
 

 
2

 

 
1

 
3

Residential
 
2

 

 
3

 

 
5

Consumer
 
1

 

 
11

 
6

 
18

Total
 
4

 
4

 
14

 
7

 
29

(1) 
Other includes underwriting exceptions.
Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, which is typically six months, and payment is reasonably assured.
The following table presents loans identified as TDRs during the three and nine months ended September 30, 2017 and 2016.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
(Dollars in thousands)
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
Commercial
 
$

 
$

 
$

 
$

 
$
781

 
$
781

 
$
1,125

 
$
1,125

Owner-occupied commercial
 

 

 

 

 
3,071

 
3,071

 

 

Commercial mortgages
 

 

 

 

 

 

 

 

Construction
 

 

 

 

 
1,836

 
1,836

 

 

Residential
 
1,058

 
1,058

 
797

 
797

 
1,300

 
1,300

 
1,523

 
1,523

Consumer
 
609

 
609

 
278

 
278

 
1,867

 
1,867

 
733

 
733

Total
 
$
1,667

 
$
1,667

 
$
1,075

 
$
1,075

 
$
8,855

 
$
8,855

 
$
3,381

 
$
3,381


During the nine months ended September 30, 2017, the TDRs set forth in the table above resulted in no increase in our allowance for loan losses, and also resulted in no additional charge-offs. For the same period of 2016, the TDRs set forth in the table above increased our allowance for loan losses by $0.1 million and resulted in charge-offs of $0.1 million. At September 30, 2017, four TDRs defaulted that had received troubled debt modification during the past twelve months with a total loan amount of $3.7 million.

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Table of Contents

7. GOODWILL AND INTANGIBLES
In accordance with FASB ASC 805, Business Combinations (ASC 805) and FASB ASC 350, Intangibles-Goodwill and Other (ASC 350), all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value.
During the nine months ended September 30, 2017, we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.
The following table shows the changes in our goodwill during nine months ended September 30, 2017 as well as the allocation of goodwill to our reportable operating segments for purposes of goodwill impairment testing:
 
 
 
WSFS
 
Cash
 
Wealth
 
Consolidated
(Dollars in thousands)
 
Bank
 
Connect
 
Management
 
Company
December 31, 2016
 
$
147,396

 
$

 
$
20,143

 
$
167,539

Remeasurement adjustments
 
(1,588
)
 

 
56

 
(1,532
)
September 30, 2017
 
$
145,808

 
$

 
$
20,199

 
$
166,007

ASC 350 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.
The following tables summarize other intangible assets:
 
 
 
September 30, 2017
(Dollars in thousands)
 
Gross Intangible Assets
 
Accumulated Amortization
 
Net Intangible Assets
 
Amortization Period
Core deposits
 
$
10,658

 
$
(3,997
)
 
$
6,661

 
10 years
Customer relationships
 
17,560

 
(3,813
)
 
13,747

 
7-15 years
Non-compete agreements
 
221

 
(46
)
 
175

 
5 years
Loan servicing rights
 
2,056

 
(1,161
)
 
895

 
10-30 years
Favorable lease asset
 
1,932

 
(301
)
 
1,631

 
10 months-18 years
Total intangible assets
 
$
32,427

 
$
(9,318
)
 
$
23,109

 
 
 
 
December 31, 2016
(Dollars in thousands)
 
Gross Intangible Assets
 
Accumulated Amortization
 
Net Intangible Assets
 
Amortization Period
Core deposits
 
$
13,128

 
$
(5,630
)
 
$
7,498

 
10 years
Customer relationships
 
17,561

 
(2,612
)
 
14,949

 
7-15 years
Non-compete agreements
 
1,006

 
(728
)
 
278

 
6 months-5 years
Loan servicing rights
 
1,708

 
(1,067
)
 
641

 
10-30 years
Favorable lease asset
 
458

 
(116
)
 
342

 
10 months-15 years
Total intangible assets
 
$
33,861

 
$
(10,153
)
 
$
23,708

 
 
Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits and either accelerated or straight-line methods of amortization. During the nine months ended September 30, 2017, we recognized amortization expense on other intangible assets of $2.3 million.

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Table of Contents

The following table shows the estimated future amortization expense related to our intangible assets:
 
(Dollars in thousands)
 
Amortization
of Intangibles
Remaining in 2017
 
$
757

2018
 
2,986

2019
 
2,918

2020
 
2,722

2021
 
2,396

Thereafter
 
11,330

Total
 
$
23,109


8. ASSOCIATE BENEFIT PLANS
Postretirement Medical Benefits
We share certain costs of providing health and life insurance benefits to eligible retired Associates (employees) and their eligible dependents. Previously, all Associates were eligible for these benefits if they reached normal retirement age while working for us. Effective March 31, 2014, we changed the eligibility of this plan to include only those Associates who have achieved ten years of service with us as of March 31, 2014. As of December 31, 2014, we began to use the mortality table issued by the Office of the Actuary of the U.S. Bureau of Census in October 2014 in our calculation.
We account for our obligations under the provisions of FASB ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that we recognize the costs of these benefits over an Associate’s active working career. Amortization of unrecognized net gains or losses resulting from experience different from that assumed and from changes in assumptions is included as a component of net periodic benefit cost over the remaining service period of active employees to the extent that such gains and losses exceed 10% of the accumulated postretirement benefit obligation, as of the beginning of the year.
The following are disclosures of the net periodic benefit cost components of postretirement medical benefits measured at January 1, 2017 and 2016.
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
11

 
$
14

 
$
40

 
$
43

Interest cost
 
16

 
19

 
54

 
57

Prior service cost amortization
 
(19
)
 
(18
)
 
(57
)
 
(44
)
Net gain recognition
 
(18
)
 
(16
)
 
(52
)
 
(47
)
Net periodic benefit cost
 
$
(10
)
 
$
(1
)
 
$
(15
)
 
$
9


Alliance Associate Pension Plan

During the fourth quarter of 2015, we completed the acquisition of Alliance and its wholly owned subsidiary, Alliance Bank, headquartered in Broomall, Pennsylvania. At the time of the acquisition we assumed the Alliance pension plan offered to its current associates.

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Table of Contents

The following table shows the net periodic benefit cost components for the Alliance Associate Pension Plan benefits measured at January 1, 2017.
(Dollars in thousands)
 
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
Service cost
 
$
10

 
$
30

Interest cost
 
75

 
225

Expected Return on Plan Assets
 
(135
)
 
(405
)
Prior service cost amortization
 

 

Net gain recognition
 

 

Net periodic benefit cost
 
$
(50
)
 
$
(150
)
9. INCOME TAXES
We account for income taxes in accordance with FASB ASC 740, Income Taxes (ASC 740). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based on changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.
ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.
There were no unrecognized tax benefits as of September 30, 2017. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2014 through 2016 tax years are subject to examination as of September 30, 2017. We do not expect to record or realize any material unrecognized tax benefits during 2017.
As a result of the adoption of ASU No. 2014-01, “Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects,” the amortization of our low-income housing credit investments has been reflected as income tax expense. Accordingly, $0.4 million of such amortization has been reflected as income tax expense for the three months ended September 30, 2017 and September 30, 2016, and $1.2 million of such amortization has been reflected as income tax expense for the nine months ended September 30, 2017 and September 30, 2016.
The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the nine months ended September 30, 2017 were $1.2 million, $1.2 million and $0.3 million, respectively. The carrying value of the investment in affordable housing credits is $14.2 million at September 30, 2017, compared to $15.4 million at December 31, 2016.

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10. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following tables present financial instruments carried at fair value as of September 30, 2017 and December 31, 2016 by level in the valuation hierarchy (as described above):
 
 
September 30, 2017
(Dollars in thousands)
 
Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
CMO
 
$

 
$
267,808

 
$

 
$
267,808

FNMA MBS
 

 
431,242

 

 
431,242

FHLMC MBS
 

 
85,062

 

 
85,062

GNMA MBS
 

 
25,697

 

 
25,697

Other investments
 
624

 

 

 
624

Other assets
 

 
1,338

 

 
1,338

Total assets measured at fair value on a recurring basis
 
$
624

 
$
811,147

 
$

 
$
811,771

 
 
 
 
 
 
 
 
 
Liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Other liabilities
 
$

 
$
2,736

 
$

 
$
2,736

 
 
 
 
 
 
 
 
 
Assets measured at fair value on a nonrecurring basis:
 
 
 
 
 
 
 
 
Other real estate owned
 
$

 
$

 
$
3,924

 
$
3,924

Loans held for sale
 

 
19,313

 

 
19,313

Impaired loans, net
 

 

 
52,903

 
52,903

Total assets measured at fair value on a nonrecurring basis
 
$

 
$
19,313

 
$
56,827

 
$
76,140


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Table of Contents

 
 
December 31, 2016
(Dollars in thousands)
 
Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
CMO
 
$

 
$
261,215

 
$

 
$
261,215

FNMA MBS
 

 
405,764

 

 
405,764

FHLMC MBS
 

 
63,515

 

 
63,515

GNMA MBS
 

 
28,416

 

 
28,416

GSE
 

 
35,010

 

 
35,010

Other investments
 
623

 

 

 
623

Other assets
 

 
1,508

 

 
1,508

Total assets measured at fair value on a recurring basis
 
$
623

 
$
795,428

 
$

 
$
796,051

 
 
 
 
 
 
 
 
 
Liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Other liabilities
 
$

 
$
3,380

 
$

 
$
3,380

 
 
 
 
 
 
 
 
 
Assets measured at fair value on a nonrecurring basis
 
 
 
 
 
 
 
 
Other real estate owned
 
$

 
$

 
$
3,591

 
$
3,591

Loans held for sale
 

 
54,782

 

 
54,782

Impaired loans, net
 

 

 
46,499

 
46,499

Total assets measured at fair value on a nonrecurring basis
 
$

 
$
54,782

 
$
50,090

 
$
104,872

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2017.
Fair value is based on quoted market prices, where available. If such quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Available-for-sale securities
As of September 30, 2017, securities classified as available-for-sale are reported at fair value using Level 2 inputs, except for one mutual fund asset acquired as part of the Penn Liberty acquisition, which is categorized as Level 1. Included in the Level 2 total are $809.8 million in Federal Agency MBS. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.
Other real estate owned
Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.

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Loans held for sale
The fair value of our loans held for sale is based on estimates using Level 2 inputs. These inputs are based on pricing information obtained from wholesale mortgage banks and brokers and applied to loans with similar interest rates and maturities.
Impaired loans
We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
The gross amount of impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans was $55.9 million and $51.6 million at September 30, 2017 and December 31, 2016, respectively. The valuation allowance on impaired loans was $2.9 million as of September 30, 2017 and $3.4 million as of December 31, 2016.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents
For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.
Investment securities
Fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology as described above in available-for-sale securities.
Loans held for sale
Loans held for sale are carried at their fair value (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, owner-occupied commercial, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans, with the exception of reverse mortgages, are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair values of reverse mortgages are based on the net present value of the expected cash flows using a discount rate specific to the reverse mortgages portfolio. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.
Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh

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The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.
Other assets
Other assets includes, among others, other real estate owned (see discussion earlier in this note) and our investment in Visa Class B stock. Our ownership includes shares acquired at no cost from our prior participation in Visa’s network, while Visa operated as a cooperative. During 2016 and 2017 we purchased additional shares which are accounted for as non-marketable equity securities and carried at cost. We evaluate the shares carried at cost for OTTI periodically. As of September 30, 2017, our evaluation indicated that there was no OTTI of these shares. Following resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares.

Only current owners of Class B shares are allowed to purchase other Class B shares.  We estimate the value of our Visa Class B shares to be $44.1 million as of September 30, 2017.

Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.
Borrowed funds
Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other Liabilities
Other liabilities includes, among others, cash flow derivatives and derivative on the residential mortgage held for sale pipeline. Valuation of our cash flow derivative is obtained from an independent pricing service and also from the derivative counterparty. Valuation for the residential mortgage held for sale pipeline is based on valuation of the loans held for sale portfolio as described above in Loans held for sale.
Off-balance sheet instruments
The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either us or the borrower, they only have value to us and the borrower.

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The book value and estimated fair value of our financial instruments are as follows:
 
(Dollars in thousands)
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Fair Value
Measurement
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
733,365

 
$
733,365

 
$
821,923

 
$
821,923

Investment securities available for sale
 
See previous table
 
810,433

 
810,433

 
794,543

 
794,543

Investment securities held to maturity
 
Level 2
 
161,721

 
163,397

 
164,346

 
163,232

Loans, held for sale
 
Level 2
 
19,313

 
19,313

 
54,782

 
54,782

Loans, net(1)(2)
 
Level 2,3
 
4,617,313

 
4,596,437

 
4,397,876

 
4,300,963

Impaired loans, net
 
Level 3
 
52,903

 
52,903

 
46,499

 
46,499

Stock in FHLB of Pittsburgh
 
Level 2
 
33,277

 
33,277

 
38,248

 
38,248

Accrued interest receivable
 
Level 2
 
17,789

 
17,789

 
17,027

 
17,027

Other assets
 
Level 3
 
19,618

 
49,697

 
9,189

 
15,787

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
Level 2
 
5,051,719

 
4,681,111

 
4,738,438

 
4,423,921

Borrowed funds
 
Level 2
 
1,003,308

 
999,551

 
1,267,447

 
1,264,170

Standby letters of credit
 
Level 3
 
463

 
463

 
468

 
468

Accrued interest payable
 
Level 2
 
3,882

 
3,882

 
1,151

 
1,151

Other liabilities
 
Level 2
 
2,736

 
2,736

 
3,380

 
3,380

 (1) Excludes impaired loans, net.
 (2) Includes reverse mortgage loans, which are categorized as Level 3.
At September 30, 2017 and December 31, 2016 we had no commitments to extend credit measured at fair value.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both economic conditions and our business operations. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities. We manage a matched book with respect to our derivative instruments in order to minimize our net risk exposure resulting from such transactions. Our cash flow hedging program began in the third quarter of 2016.
Fair Values of Derivative Instruments
The table below presents the fair value of our derivative financial instruments as well as their location on the Consolidated Statements of Financial Condition as of September 30, 2017.
 
Fair Values of Derivative Instruments
(Dollars in thousands)
 
Count
 
Notional
 
Balance Sheet Location
 
Liability Derivatives (Fair Value)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
3

 
$
75,000

 
Other Liabilities
 
$
2,556

Total derivatives designated as hedging instruments
 
 
 
 
 
 
 
$
2,556


Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest income and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings. During the nine months ended September 30, 2017, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the nine months ended September 30, 2017, we did not record any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest income as interest payments are received on our variable-rate pooled loans. During the next twelve months, we estimate that $0.3 million will be reclassified as an increase to interest income. During the nine months ended September 30, 2017, $0.1 million was reclassified into interest income.
We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 1 month (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
As of September 30, 2017, we had three outstanding interest rate derivatives with a notional of $75 million that were designated as cash flow hedges of interest rate risk.
Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2017 and September 30, 2016.
(Dollars in thousands)
 
Amount of Gain Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss)Reclassified from Accumulated OCI into Income (Effective Portion)
 
 
Three months ended September 30,
 
 
Derivatives in Cash Flow Hedging Relationships
 
2017
 
2016
 
 
Interest Rate Products
 
$
42

 
$

 
Interest income
Total
 
$
42

 
$

 
 
(Dollars in thousands)
 
Amount of Gain Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss)Reclassified from Accumulated OCI into Income (Effective Portion)
 
 
Nine months ended September 30,
 
 
Derivatives in Cash Flow Hedging Relationships
 
2017
 
2016
 
 
Interest Rate Products
 
$
192

 
$

 
Interest income
Total
 
$
192

 
$

 
 

Credit risk-related Contingent Features
We have agreements with certain of our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.
We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.
As of September 30, 2017, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.6 million. We have minimum collateral posting thresholds with certain of our derivative counterparties, and have posted collateral of $3.4 million against our obligations under these agreements. If we had breached any of these provisions at September 30, 2017, we could have been required to settle our obligations under the agreements at the termination value.

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12. SEGMENT INFORMATION
As defined in FASB ASC 280, Segment Reporting (ASC 280), an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax net income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying unaudited Consolidated Financial Statements. Based on these criteria, we have identified three segments: WSFS Bank, Cash Connect®, and Wealth Management.
The WSFS Bank segment provides financial products to commercial and retail customers. Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS Bank. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Accordingly, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.
Cash Connect® provides ATM vault cash and smart safe and 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. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect
The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through six business lines. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress, a registered investment adviser whose primary market segment is high-net-worth individuals, offers a "balanced" investment style focused on preservation of capital and providing current income. West Capital, a registered investment adviser, is a fee-only wealth management firm which operates under a multi-family office philosophy and provides fully-customized solutions tailored to the unique needs of institutions and high-net-worth individuals. Christiana Trust provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy administration, custodial and commercial domicile services to corporate and institutional clients. Powdermill is a multi-family office that specializes in providing unique, independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Private Banking serves high-net-worth clients by delivering credit and deposit products and partnering with other business units to deliver investment management and fiduciary products and services.

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The following table shows segment results for the three months ended September 30, 2017 and 2016:

 
 
Three months ended September 30, 2017
 
Three months ended September 30, 2016
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
62,748

 
$

 
$
2,262

 
$
65,010

 
53,332

 

 
2,005

 
55,337

Noninterest income
 
12,102

 
11,212

 
9,127

 
32,441

 
11,957

 
9,369

(r) 
6,260

 
27,586

Total external customer revenues
 
74,850

 
11,212

 
11,389

 
97,451

 
65,289

 
9,369

 
8,265

 
82,923

Inter-segment revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
2,537

 

 
2,235

 
4,772

 
1,302

 

 
1,698

 
3,000

Noninterest income
 
1,721

 
213

 
37

 
1,971

 
2,140

 
229

 
27

 
2,396

Total inter-segment revenues
 
4,258

 
213

 
2,272

 
6,743

 
3,442

 
229

 
1,725

 
5,396

Total revenue
 
79,108

 
11,425

 
13,661

 
104,194

 
68,731

 
9,598

 
9,990

 
88,319

External customer expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
8,542

 

 
339

 
8,881

 
6,113

 

 
203

 
6,316

Noninterest expenses
 
39,546

 
7,048

 
7,569

 
54,163

 
40,991

 
5,743

(r) 
4,500

 
51,234

Provision for loan losses
 
3,065

 

 
(169
)
 
2,896

 
5,669

 

 
159

 
5,828

Total external customer expenses
 
51,153

 
7,048

 
7,739

 
65,940

 
52,773

 
5,743

 
4,862

 
63,378

Inter-segment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
2,235

 
1,856

 
681

 
4,772

 
1,698

 
790

 
512

 
3,000

Noninterest expenses
 
250

 
556

 
1,165

 
1,971

 
256

 
744

 
1,396

 
2,396

Total inter-segment expenses
 
2,485

 
2,412

 
1,846

 
6,743

 
1,954

 
1,534

 
1,908

 
5,396

Total expenses
 
53,638

 
9,460

 
9,585

 
72,683

 
54,727

 
7,277

 
6,770

 
68,774

Income before taxes
 
$
25,470

 
$
1,965

 
$
4,076

 
$
31,511

 
$
14,004

 
$
2,321

 
$
3,220

 
$
19,545

Income tax provision
 
 
 
 
 
 
 
10,942

 
 
 
 
 
 
 
6,823

Consolidated net income
 
 
 
 
 
 
 
$
20,569

 
 
 
 
 
 
 
$
12,722

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
2,688

 
$
35

 
$
117

 
$
2,840

 
$
10,900

 
$
248

 
$
11

 
$
11,159


(r) Noninterest income and noninterest expense for the period ended September 30, 2016 have been restated to correct an immaterial error related to revenue earned for cash servicing fees. See Note 1 - Basis of Presentation for further information.






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The following table shows segment results for the nine months ended September 30, 2017 and 2016:

 
 
Nine months ended September 30, 2017
 
Nine months ended September 30, 2016
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
181,670

 
$

 
$
6,500

 
$
188,170

 
$
150,862

 
$

 
$
6,024

 
$
156,886

Noninterest income
 
34,318

 
31,403

 
26,488

 
92,209

 
31,982

 
26,437

(r) 
18,343

 
76,762

Total external customer revenues
 
215,988

 
31,403

 
32,988

 
280,379

 
182,844

 
26,437

 
24,367

 
233,648

Inter-segment revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
6,780

 

 
6,735

 
13,515

 
3,498

 

 
5,245

 
8,743

Noninterest income
 
5,791

 
611

 
113

 
6,515

 
6,211

 
632

 
76

 
6,919

Total inter-segment revenues
 
12,571

 
611

 
6,848

 
20,030

 
9,709

 
632

 
5,321

 
15,662

Total revenue
 
228,559

 
32,014

 
39,836

 
300,409

 
192,553

 
27,069

 
29,688

 
249,310

External customer expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
23,744

 

 
880

 
24,624

 
15,506

 

 
589

 
16,095

Noninterest expenses
 
117,288

 
19,774

 
21,334

 
158,396

 
109,265

 
16,681

(r) 
13,771

 
139,717

Provision for loan losses
 
6,097

 

 
804

 
6,901

 
7,675

 

 
187

 
7,862

Total external customer expenses
 
147,129

 
19,774

 
23,018

 
189,921

 
132,446

 
16,681

 
14,547

 
163,674

Inter-segment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
6,735

 
4,843

 
1,937

 
13,515

 
5,245

 
1,973

 
1,525

 
8,743

Noninterest expenses
 
724

 
1,944

 
3,847

 
6,515

 
708

 
2,186

 
4,025

 
6,919

Total inter-segment expenses
 
7,459

 
6,787

 
5,784

 
20,030

 
5,953

 
4,159

 
5,550

 
15,662

Total expenses
 
154,588

 
26,561

 
28,802

 
209,951

 
138,399

 
20,840

 
20,097

 
179,336

Income before taxes
 
$
73,971

 
$
5,453

 
$
11,034

 
$
90,458

 
$
54,154

 
$
6,229

 
$
9,591

 
$
69,974

Income tax provision
 
 
 
 
 
 
 
30,382

 
 
 
 
 
 
 
24,004

Consolidated net income
 
 
 
 
 
 
 
$
60,076

 
 
 
 
 
 
 
$
45,970

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
6,611

 
$
103

 
$
480

 
$
7,194

 
$
14,346

 
$
672

 
$
19

 
$
15,037


(r) Noninterest income and noninterest expense for the period ended September 30, 2016 have been restated to correct an immaterial error related to revenue earned for cash servicing fees. See Note 1 - Basis of Presentation for further information.


The following table shows significant components of segment net assets as of September 30, 2017 and December 31, 2016:

 
 
September 30, 2017
 
December 31, 2016
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statement of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
94,169

 
$
631,883

 
$
7,313

 
$
733,365

 
$
100,893

 
$
717,643

 
$
3,387

 
$
821,923

Goodwill
 
145,808

 

 
20,199

 
166,007

 
147,396

 

 
20,143

 
167,539

Other segment assets
 
5,757,941

 
2,983

 
215,048

 
5,975,972

 
5,545,611

 
3,533

 
226,664

 
5,775,808

Total segment assets
 
$
5,997,918

 
$
634,866

 
$
242,560

 
$
6,875,344

 
$
5,793,900

 
$
721,176

 
$
250,194

 
$
6,765,270









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13. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales
Given the current interest rate environment and our overall asset and liability management approach, we typically sell newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to government sponsored entities (GSEs) such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on our unaudited Consolidated Statements of Financial Condition at fair value with changes in the value reflected in our unaudited Consolidated Statements of Income. Gains and losses are recognized at the time of sale. We periodically retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in our intangible assets in our unaudited Consolidated Statements of Financial Condition. Otherwise, we sell loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that we intend to sell in the secondary market are accounted for as derivatives under ASC Topic 815, Derivatives and Hedging (ASC:815).
We do not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were no such repurchases for the nine months ended September 30, 2017.
Swap Guarantees
We entered into agreements with three unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives
At both September 30, 2017 and December 31, 2016, there were 134 variable-rate to fixed-rate swap transactions between the third party financial institutions and our customers. The initial notional aggregate amount was approximately $557.1 million at September 30, 2017 compared to $518.8 million at December 31, 2016. At September 30, 2017 maturities ranged from under one year to ten years. The aggregate market value of these swaps to the customers was a liability of $8.6 million at September 30, 2017 and $10.9 million at December 31, 2016. We had no reserves for the swap guarantees as of September 30, 2017.











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14. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income includes unrealized gains and losses on available-for-sale investments, unrealized gains and losses on cash flow hedges, as well as unrecognized prior service costs, transition costs, and actuarial gains and losses on defined benefit pension plans. Changes to accumulated other comprehensive (loss) income are presented net of tax as a component of stockholders' equity. Amounts that are reclassified out of accumulated other comprehensive (loss) income are recorded on the Consolidated Statement of Income either as a gain or loss.
Changes to accumulated other comprehensive (loss) income by component are shown net of taxes in the following tables for the period indicated:
 
(Dollars in thousands)
 
Net change in
investment
securities
available for sale
 
Net change
in securities
held to
maturity
 
Net
change in
defined
benefit
plan
 
Net change in
fair value of
derivative
used for cash
flow hedge
 
Total
Balance, June 30, 2017
 
$
(4,342
)
 
$
1,194

 
$
912

 
$
(1,622
)
 
$
(3,858
)
Other comprehensive income before reclassifications
 
1,289

 

 

 
42

 
1,331

Less: Amounts reclassified from accumulated other comprehensive (loss) income
 
(475
)
 
(99
)
 
(22
)
 

 
(596
)
Net current-period other comprehensive income (loss)
 
814

 
(99
)
 
(22
)
 
42

 
735

Balance, September 30, 2017
 
$
(3,528
)
 
$
1,095

 
$
890

 
$
(1,580
)
 
$
(3,123
)
Balance, June 30, 2016
 
$
12,841

 
$
1,592

 
$
1,244

 
$

 
$
15,677

Other comprehensive (loss) income before reclassifications
 
(1,112
)
 

 

 
61

 
(1,051
)
Less: Amounts reclassified from accumulated other comprehensive income
 
(645
)
 
(102
)
 
(20
)
 

 
(767
)
Net current-period other comprehensive (loss) income
 
(1,757
)
 
(102
)
 
(20
)
 
61

 
(1,818
)
Balance, September 30, 2016
 
$
11,084

 
$
1,490

 
$
1,224

 
$
61

 
$
13,859

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
$
(8,194
)
 
$
1,392

 
$
957

 
$
(1,772
)
 
$
(7,617
)
Other comprehensive income before reclassifications
 
5,802

 

 

 
192

 
5,994

Less: Amounts reclassified from accumulated other comprehensive (loss) income
 
(1,136
)
 
(297
)
 
(67
)
 

 
(1,500
)
Net current-period other comprehensive income (loss)
 
4,666

 
(297
)
 
(67
)
 
192

 
4,494

Balance, September 30, 2017
 
$
(3,528
)
 
$
1,095

 
$
890

 
$
(1,580
)
 
$
(3,123
)
Balance, December 31, 2015
 
$
(1,887
)
 
$
1,795

 
$
788

 
$

 
$
696

Other comprehensive income before reclassifications
 
14,143

 

 

 
61

 
14,204

Less: Amounts reclassified from accumulated other comprehensive (loss) income
 
(1,172
)
 
(305
)
 
436

 

 
(1,041
)
Net current-period other comprehensive income (loss)
 
12,971

 
(305
)
 
436

 
61

 
13,163

Balance, September 30, 2016
 
$
11,084

 
$
1,490

 
$
1,224

 
$
61

 
$
13,859


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The Consolidated Statements of Income were impacted by components of other comprehensive income (loss) as shown in the table below:
 
(Dollars in thousands)
 
Three Months Ended September 30,
 
Affected line item in Consolidated Statements of Income
 
 
2017
 
2016
 
Securities available for sale:
 
 
 
 
 
 
Realized gains on securities transactions
 
$
(736
)
 
$
(1,040
)
 
Security gains, net
Income taxes
 
261

 
395

 
Income tax provision
Net of tax
 
$
(475
)
 
$
(645
)
 
 
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
 
 
 
 
 
 
Amortization of net unrealized gains to income during the period
 
$
(159
)
 
$
(162
)
 
Interest income on investment securities
Income taxes
 
60

 
60

 
Income tax provision
Net of tax
 
$
(99
)
 
$
(102
)
 
 
Amortization of Defined Benefit Pension items:
 
 
 
 
 
 
Prior service (credits) costs
 
$
(19
)
 
$
(18
)
 
 
Actuarial (gains) losses
 
(18
)
 
(16
)
 
 
Total before tax
 
$
(37
)
 
$
(34
)
 
Salaries, benefits and other compensation
Income taxes
 
15

 
14

 
Income tax provision
Net of tax
 
(22
)
 
(20
)
 
 
Total reclassifications
 
$
(596
)
 
$
(767
)
 
 
(Dollars in thousands)
 
Nine Months Ended September 30,
 
Affected line item in Consolidated Statements of Income
 
 
2017
 
2016
 
Securities available for sale:
 
 
 
 
 
 
Realized gains on securities transactions
 
$
(1,764
)
 
$
(1,890
)
 
Security gains, net
Income taxes
 
628

 
718

 
Income tax provision
Net of tax
 
$
(1,136
)
 
$
(1,172
)
 
 
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
 
 
 
 
 
 
Amortization of net unrealized gains to income during the period
 
$
(478
)
 
$
(492
)
 
Interest income on investment securities
Income taxes
 
181

 
187

 
Income tax provision
Net of tax
 
$
(297
)
 
$
(305
)
 
 
Amortization of Defined Benefit Pension items:
 
 
 
 
 
 
Prior service (credits) costs
 
$
(57
)
 
$
(44
)
 
 
Actuarial (gains) losses
 
(52
)
 
746

 
 
Total before tax
 
$
(109
)
 
$
702

 
Salaries, benefits and other compensation
Income taxes
 
42

 
(266
)
 
Income tax provision
Net of tax
 
(67
)
 
436

 
 
Total reclassifications
 
$
(1,500
)
 
$
(1,041
)
 
 


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15. RELATED PARTY TRANSACTIONS
In the ordinary course of business, from time to time we enter into transactions with related parties, including, but not limited to, our officers and directors. These transactions are made on substantially the same terms and conditions, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other customers. They do not, in the opinion of management, involve greater than normal credit risk or include other unfavorable features.
The outstanding balances of loans to related parties at September 30, 2017 and December 31, 2016 were $1.1 million and $1.3 million, respectively. Total deposits from related parties at September 30, 2017 and December 31, 2016 were $6.6 million and $3.6 million, respectively. During the third quarter of 2017, new loans and credit line advances to related parties and repayments were each less than $0.1 million. For the nine months ended September 30, 2017, new loans and credit line advances to related parties were $0.4 million and repayments were $0.6 million.

16. LEGAL AND OTHER PROCEEDINGS
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation-related matters that arise in the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, our defense of litigation claims may result in legal fees, which we expense as incurred.
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation-related matters that arise in the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, our defense of litigation claims may result in legal fees, which we expense as incurred.
On April 7, 2015, WSFS Bank received a notice of arbitration and statement of claim (the Claim) from Universitas Education, LLC (Universitas) relating to Christiana Trust acting as “insurance trustee” of the Charter Oak Trust Welfare Benefit Plan (the Trust). The actions underlying the Claim occurred during a period prior to WSFS’ acquisition of Christiana Trust. According to the allegations contained in the Claim, certain life insurance policy benefits paid to an individual claiming/purporting to be a trustee of the Trust were misappropriated by individuals associated with the plan sponsor. None of those individuals, however, were employed by or agents of Christiana Trust or WSFS Bank. It is alleged that Christiana Trust, as insurance trustee, owed a fiduciary duty to the beneficiaries of the Trust and that it breached its fiduciary duty, was negligent, and aided and abetted fraud and theft in connection with the misappropriation of funds. It is further alleged that Universitas was the rightful beneficiary under the Trust of the misappropriated funds, and thus was harmed because it did not receive the death benefits that had been paid over to the purported trustee of the Trust. While the face amounts of the two insurance policies in question total $30 million, Universitas revised its total Claim to assert an alleged loss of approximately $27 million plus costs and interest to date of $27 million. WSFS is vigorously defending itself against the Claim and believes that it has valid factual and legal defenses to the Claim. The evidentiary hearing concluded late in the third quarter of 2017 and post-trial briefing will conclude in late November 2017. It is anticipated that a decision in the arbitration will be rendered during the fourth quarter of 2017 or the first quarter of 2018. WSFS does not believe that the ultimate resolution of the Claim will have a material adverse effect on the Company, but there can be no assurance as to the ultimate outcome.
There were no material changes or additions to other significant pending legal or other proceedings involving us other than those arising out of routine operations.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WSFS Financial Corporation (the Company or WSFS) 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 continuously operating under the same name in the United States (U.S.). At $6.88 billion in assets and $18.07 billion in assets under management (AUM) and assets under administration, WSFS Bank is also the largest bank and trust company headquartered in the Delaware Valley. As a federal savings bank, which was formerly chartered as a state mutual savings bank, the Bank enjoys broader fiduciary powers than most other types of financial institutions. A fixture in the community, we have been in operation for more than 185 years. In addition to our focus on stellar customer service, we have continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution. We state our mission simply: “We Stand for Service.” Our strategy of “Engaged Associates delivering Stellar Experiences growing Customer Advocates and value for our Owners” focuses on exceeding customer expectations, delivering stellar experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.
We have five consolidated subsidiaries: WSFS Bank, WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress) and Christiana Trust Company of Delaware (Christiana Trust DE). We also have one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has three wholly-owned subsidiaries: WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC.
Our core banking business is commercial lending funded by customer-generated deposits. We have built a $3.92 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering the high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits. As of September 30, 2017, we service our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches, and mortgage and title services through our branches and Pennsylvania-based WSFS Mortgage. WSFS Mortgage is a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions.
The Cash Connect® segment is a premier provider of ATM vault cash, smart safe and cash logistics in the U.S. Cash Connect® manages $890.3 million in total cash and services over 22,000 non-bank ATMs and over 1,200 smart safes nationwide. Cash Connect® provides related services such as online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing equipment sales and deposit safe cash logistics. Cash Connect® also operates over 440 ATMs for the Bank, which has the largest branded ATM network in Delaware.
As a provider of ATM vault cash to the U.S. ATM industry, Cash Connect® is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 17 year history, Cash Connect® periodically has been exposed to losses through theft from armored courier companies and consistently has been able to recover losses through its risk management strategies.
The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through six businesses. WSFS Wealth Investments, with $177.2 million in AUM, provides insurance and brokerage products primarily to our retail banking clients. Cypress, a registered investment adviser with approximately $860.2 million in AUM (includes $122.9 million of Christiana Trust assets for which Cypress serves as sub-adviser), is a fee-only wealth management firm offering a “balanced” investment style focused on preservation of capital and providing current income whose primary market segment is high-net-worth individuals. West Capital, a registered investment adviser with approximately $839.6 million in AUM, is a fee-only wealth management firm which operates under a multi-family office philosophy and provides fully customized solutions tailored to the unique needs of institutions and high-net-worth individuals. Christiana Trust, with $16.31 billion in AUM and assets under administration (includes $122.9 million of Christiana Trust assets for which Cypress serves as sub-adviser), provides fiduciary and investment services to personal trust clients; and trustee, agency, bankruptcy administration, custodial and commercial domicile services to corporate and institutional clients. Powdermill is a multi-family office that specializes in providing unique, independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Private Banking serves high-net-worth clients by delivering credit and deposit products and partnering with other business units to deliver investment management and fiduciary products and services.

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As a provider of trust services to our clients, we are exposed to operational, reputation-related and legal risks due to the inherent complexity of the trust business. To mitigate these risks, we rely on the hiring, development and retention of experienced Associates, financial controls, managerial oversight, and other risk management practices. Also, from time to time our trust business may give rise to disputes with clients and we may be exposed to litigation which could result in significant costs. The ultimate outcome of any litigation is uncertain.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Our total assets increased $110.1 million, or 2%, to $6.88 billion at September 30, 2017 compared to December 31, 2016. Net loans increased $225.8 million, or 5%, primarily due to growth in the commercial and industrial (C&I), construction and consumer loan portions of our loan portfolio. Available-for-sale investment securities increased $15.9 million, or 2% as part of our balance sheet management strategy. Partially offsetting these increases, cash and cash equivalents decreased by $88.6 million, or 11%, due primarily to the redemption of $55.0 million of our 6.25% senior notes due 2019, which were issued in 2012 (the 2012 senior notes) as well as improved cash optimization at Cash Connect® resulting in lower cash balances in non-owned ATMs. Loans held for sale decreased $35.5 million, or 65%, consistent with our strategy to sell most newly originated residential mortgages in the secondary market.
Total liabilities increased $56.5 million, or less than 1%, to $6.13 billion during the nine months ended September 30, 2017. Deposits increased $313.3 million, or 7%, including an increase of $278.2 million in customer funding and an increase of $35.1 million in brokered deposits. The increase in customer funding was mainly due to an increase of $314.2 million in core deposits. This increase includes a seasonal increase in public funding balance core deposit balances of $155.7 million as well as other organic core deposit growth of $158.5 million, partially offset a decline in CDs of $36.1 million. Growth in deposits was partially offset by FHLB advances, which decreased $156.4 million, or 18%, and lower federal funds purchased and securities sold under agreement to repurchase, which decreased $60.0 million or 46%, both a result of the increase in deposits. Senior debt decreased $53.9 million or 35%, primarily due to the redemption of the 2012 senior notes, net of the associated write-off of unamortized debt issuance costs, as part of our continued net interest margin management strategy.
Capital Resources
Senior Debt: On September 1, 2017, WSFS redeemed $55.0 million in aggregate principal amount of the 2012 senior notes. We recorded noninterest expense of $0.7 million due to the write-off of unamortized debt issuance costs in connection with this redemption.
During the second quarter of 2016, WSFS issued $100.0 million in aggregate principal amount of 4.50% fixed-to-floating rate senior notes due June 15, 2026 (the 2016 senior notes). The Company is using the net proceeds from the offering for general corporate purposes. See Note 1 to the Consolidated Financial Statements for further information.
Share Repurchases: During the third quarter of 2017, WSFS repurchased 71,000 shares of common stock at an average price of $44.78 as part of our 5% share buyback program approved by the Board of Directors during the fourth quarter of 2015. WSFS has 750,194 shares, or more than 2% of outstanding shares, remaining to repurchase under this authorization.
Stockholders’ equity increased $53.5 million between December 31, 2016 and September 30, 2017. This increase was primarily due to net income for the nine months ended September 30, 2017 of $60.1 million, improvement in the fair value of our available-for-sale securities portfolio of $5.8 million (after-tax) and an increase of $4.8 million related to the issuance of stock based compensation and stock option expense. These were partially offset by year-to-date stock buybacks of $9.2 million and the payment of common stock dividends of $6.6 million.

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The table below compares the Bank's and the Company’s consolidated capital position to the minimum regulatory requirements as of September 30, 2017:
 
 
 
Consolidated
Capital
 
For Capital
Adequacy Purposes
 
To be Well-Capitalized
Under Prompt Corrective
Action Provisions
(Dollars in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Total Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
$
716,943

 
12.22
%
 
$
469,233

 
8.00
%
 
$
586,542

 
10.00
%
WSFS Financial Corporation
 
672,476

 
11.43
%
 
470,701

 
8.00
%
 
588,376

 
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
675,623

 
11.52
%
 
351,925

 
6.00
%
 
469,233

 
8.00
%
WSFS Financial Corporation
 
631,157

 
10.73
%
 
353,026

 
6.00
%
 
470,701

 
8.00
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
675,623

 
11.52
%
 
263,944

 
4.50
%
 
381,252

 
6.50
%
WSFS Financial Corporation
 
566,220

 
9.62
%
 
264,769

 
4.50
%
 
382,444

 
6.50
%
Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
675,623

 
10.24
%
 
263,794

 
4.00
%
 
329,742

 
5.00
%
WSFS Financial Corporation
 
631,157

 
9.54
%
 
264,796

 
4.00
%
 
330,996

 
5.00
%
Book value per share of common stock was $23.59 at September 30, 2017, an increase of $1.69, or 8% from $21.90 at December 31, 2016. Tangible book value per share of common stock (a non-GAAP financial measure) was $17.57 at September 30, 2017, an increase of $1.77, or 11%, from $15.80 at December 31, 2016.  We believe tangible common book value per 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 data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. For a reconciliation of tangible common book value per share to book value per share in accordance with GAAP, see "Reconciliation of Non-GAAP Measure to GAAP Measure".
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 leveraged and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.
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.
Not included in the Bank’s capital, the Company separately held $32.5 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.
As shown in the table above, as of September 30, 2017, the Bank and the Company were in compliance with regulatory capital requirements and exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

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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.
We have ready access to several funding sources to fund growth and meet our liquidity needs.  Among these are cash from operations, retail deposit programs, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to meet our funding needs as well as maintain required and prudent levels of liquidity over the next twelve months.
During the nine months ended September 30, 2017, cash and cash equivalents decreased $88.6 million to $733.4 million from $821.9 million as of December 31, 2016. Cash provided by operating activities was $107.8 million, reflecting the cash impact of earnings and sale of loans held for sale during the nine months ended September 30, 2017. Cash used by investing activities was $230.9 million, primarily due to increased lending of $232.0 million, $5.7 million of net investment in premises and equipment, and $4.1 million of net cash paid for available-for-sale securities, partially offset by $5.0 million received from net redemptions of FHLB stock and $4.4 million received from sales of other real estate owned (OREO) properties. Cash provided by financing activities was $34.5 million, primarily due to a $319.8 million net increase in deposits, partially offset by $156.4 million used to repay FHLB advances, $60.0 million from repayments on federal funds purchased and securities sold under agreement to repurchase, $55.0 million from the redemption of our 2012 senior debt, $9.2 million for repurchase of common stock, and cash paid for dividends of $6.6 million.

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.

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The following table shows our nonperforming assets and past due loans at the dates indicated:
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Nonaccruing loans:
 
 
 
 
Commercial
 
$
12,705

 
$
2,015

Owner-occupied commercial
 
3,346

 
2,078

Commercial mortgages
 
8,803

 
9,821

Construction
 
1,839

 

Residential mortgages
 
4,733

 
4,967

Consumer
 
2,110

 
3,995

Total nonaccruing loans
 
33,536

 
22,876

Other real estate owned
 
3,924

 
3,591

Restructured loans (1)
 
14,905

 
14,336

Total nonperforming assets
 
$
52,365

 
$
40,803

Past due loans: (1)
 
 
 
 
Commercial
 
$
685

 
$

Residential mortgages
 
$
557

 
$
153

Consumer
 
96

 
285

Total past due loans
 
$
1,338

 
$
438

Ratio of allowance for loan losses to total gross loans (2)
 
0.86
%
 
0.89
%
Ratio of nonaccruing loans to total gross loans (2)
 
0.71

 
0.51

Ratio of nonperforming assets to total assets
 
0.76

 
0.60

Ratio of loan loss allowance to nonaccruing loans
 
119.87

 
173.77

Ratio of loan loss allowance to total nonperforming assets
 
0.77

 
0.97

(1) 
Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans.
(2) 
Total loans exclude loans held for sale and reverse mortgages.
Nonperforming assets increased $11.6 million between December 31, 2016 and September 30, 2017. As a result, the ratio of nonperforming assets to total assets increased to 0.76% at September 30, 2017 from 0.60% at December 31, 2016. The increase was primarily due to one locally-based, commercial and industrial participation that was downgraded during the first quarter of 2017 after a targeted energy sector review which has a current balance of $9.0 million. The loan relationship has been, and continues to be, paying current, and positive resolution is expected. A comprehensive impairment analysis was completed and the results are included in the provision for loan losses for the nine months ended September 30, 2017. Owner-occupied commercial and construction nonaccruing loans increased as several smaller relationships migrated to nonaccruing. Commercial mortgage nonaccruing loans declined $1.0 million and consumer nonaccruing loans declined $1.9 million due to the repayment of one long-term problem loan of $1.3 million as well as several loans which returned to accrual status.
The following table summarizes the changes in nonperforming assets during the periods indicated:
 
 
 
Nine months ended
 
Nine months ended
(Dollars in thousands)
 
September 30, 2017
 
September 30, 2016
Beginning balance
 
$
40,803

 
$
39,892

Additions
 
37,028

 
32,918

Collections
 
(14,890
)
 
(23,950
)
Transfers to accrual
 
(2,694
)
 
(681
)
Charge-offs
 
(7,882
)
 
(7,593
)
Ending balance
 
$
52,365

 
$
40,586

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 utilizes guidelines established by federal regulation.

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INTEREST RATE SENSITIVITY
The matching of 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 is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At September 30, 2017, interest-earning liabilities exceeded interest-bearing assets that mature or reprice within one year (interest-sensitive gap) by $116.9 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 91.03% at December 31, 2016 to 96.35% at September 30, 2017. Likewise, the one-year interest-sensitive gap as a percentage of total assets increased from (4.41)% at December 31, 2016 to (1.70)% at September 30, 2017. The low rate level of sensitivity reflects our continuing efforts to effectively manage interest rate risk.
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, which we are required to perform by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.
The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at September 30, 2017 and December 31, 2016:
 
 
 
September 30, 2017
 
December 31, 2016
% Change in Interest Rate (Basis Points)
 
% Change in Net
Interest Margin (1)
 
Economic Value of Equity (2)
 
% Change in Net
Interest Margin (1)
 
Economic Value of Equity (2)
+300
 
6%
 
15.95%
 
3%
 
14.04%
+200
 
4%
 
15.96%
 
2%
 
14.09%
+100
 
2%
 
15.79%
 
<1%
 
14.00%
 
—%
 
15.47%
 
—%
 
13.80%
-100
 
(3)%
 
14.53%
 
<1%
 
13.08%
-200(3)
 
NMF
 
NMF
 
NMF
 
NMF
-300(3)
 
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 of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3) 
Sensitivity indicated by a decrease of 200 or 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 revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.


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RESULTS OF OPERATIONS
Three months ended September 30, 2017: Net income was $20.6 million for the three months ended September 30, 2017 compared with $12.7 million for the three months ended September 30, 2016. Net interest income for the three months ended September 30, 2017 was $56.1 million, an increase of $7.1 million compared to the three months ended September 30, 2016, due primarily to loan portfolio growth, partially offset by higher interest expense related to deposit growth, our issuance of the 2016 senior notes during the second quarter of 2016, and higher FHLB advances. Noninterest income increased $4.9 million to $32.4 million during the three months ended September 30, 2017, primarily due to increased investment management and fiduciary revenue and growth in credit/debit card and ATM income. See “Noninterest (Fee) Income” for further information. Partially offsetting these increases was a $2.9 million increase in noninterest expense during the three months ended September 30, 2017, primarily reflecting higher employee-related and ongoing operating costs to support our organic and acquisition growth. See “Noninterest Expense” for further information.
Nine months ended September 30, 2017: Net income was $60.1 million for the nine months ended September 30, 2017 compared with $46.0 million for the nine months ended September 30, 2016. Net interest income for the nine months ended September 30, 2017 was $163.5 million, an increase of $22.8 million compared to the nine months ended September 30, 2016, due primarily to loan portfolio growth, partially offset by higher interest expense related to deposit growth, our issuance of the 2016 senior notes late in the second quarter of 2016, and higher FHLB advances. Noninterest income increased $15.4 million to $92.2 million during the nine months ended September 30, 2017, primarily due to increased investment management and fiduciary revenue and growth in credit/debit card and ATM income. See “Noninterest (Fee) Income” for further information. Partially offsetting these increases was a $18.7 million increase in noninterest expenses during the nine months ended September 30, 2017, primarily reflecting higher employee-related and ongoing operating costs to support our organic and acquisition growth. See “Noninterest Expense” for further information.
Efficiency Ratio: Our noninterest expenses are driven by our high-touch, high-service model. This, combined with our significant and diverse fee income mix, resulted in a third quarter 2017 efficiency ratio of 60.6% compared to 66.2% for the third quarter of 2016 and 60.8% for the second quarter of 2017. Management believes its operating costs are at an appropriate level and scale for our size, products and services as our fee-based businesses typically carry a higher efficiency ratio as they derive revenue primarily based on active human capital costs versus passive assets. We continue to optimize and review our operations in order to limit cost increases or reduce costs, and expect continued improvement of our efficiency ratio in the fourth quarter, resulting in a fourth quarter ratio in the high 50%s. We expect to achieve our goal of a relatively flat efficiency ratio for the full year 2017 as compared to full year 2016 through continued reinvestment in our balance sheet and capabilities to support our organic and acquisition-related growth, as well as increased contributions from our fee-based businesses.


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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,
 
 
2017
 
2016
(Dollars in thousands)
 
Average
Balance
 
Interest
 
Yield/
Rate (1)
 
Average
Balance
 
Interest
 
Yield/
Rate (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
 
$
1,422,306

 
$
18,186

 
5.07
%
 
$
1,264,882

 
$
15,470

 
4.87
%
Residential real estate loans
 
269,134

 
3,747

 
5.57

 
283,818

 
4,490

 
6.33

Commercial loans
 
2,471,382

 
30,013

 
4.85

 
2,187,214

 
25,050

 
4.59

Consumer loans
 
509,750

 
6,329

 
4.93

 
414,653

 
4,485

 
4.30

Loans held for sale
 
22,734

 
229

 
4.03

 
40,615

 
354

 
3.49

Total loans
 
4,695,306

 
58,504

 
4.96

 
4,191,182

 
49,849

 
4.75

Mortgage-backed securities (3)
 
809,655

 
4,955

 
2.45

 
736,100

 
3,854

 
2.09

Investment securities (3)
 
168,526

 
1,139

 
4.08

 
201,264

 
1,214

 
3.54

Other interest-earning assets
 
36,992

 
412

 
4.46

 
35,033

 
420

 
4.80

Total interest-earning assets
 
5,710,479

 
65,010

 
4.57
%
 
5,163,579

 
55,337

 
4.32
%
Allowance for loan losses
 
(40,831
)
 
 
 
 
 
(39,053
)
 
 
 
 
Cash and due from banks
 
118,056

 
 
 
 
 
122,561

 
 
 
 
Cash in non-owned ATMs
 
558,855

 
 
 
 
 
600,821

 
 
 
 
Bank-owned life insurance
 
102,513

 
 
 
 
 
100,989

 
 
 
 
Other noninterest-earning assets
 
344,783

 
 
 
 
 
241,370

 
 
 
 
Total assets
 
$
6,793,855

 
 
 
 
 
$
6,190,267

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
939,239

 
$
606

 
0.26
%
 
$
855,052

 
$
295

 
0.14
%
Money market
 
1,324,946

 
1,227

 
0.37

 
1,162,986

 
850

 
0.29

Savings
 
564,275

 
264

 
0.19

 
494,482

 
180

 
0.14

Customer time deposits
 
555,668

 
1,188

 
0.85

 
567,600

 
874

 
0.61

Total interest-bearing customer deposits
 
3,384,128

 
3,285

 
0.39

 
3,080,120

 
2,199

 
0.28

Brokered certificates of deposit
 
195,073

 
577

 
1.17

 
142,133

 
213

 
0.60

Total interest-bearing deposits
 
3,579,201

 
3,862

 
0.43

 
3,222,253

 
2,412

 
0.30

FHLB of Pittsburgh advances
 
730,390

 
2,402

 
1.30

 
768,305

 
1,225

 
0.63

Trust preferred borrowings
 
67,011

 
500

 
2.96

 
67,011

 
415

 
2.46

Senior debt
 
134,658

 
1,807

 
5.37

 
151,875

 
2,119

 
5.58

Other borrowed funds (4)
 
132,030

 
310

 
0.93

 
114,312

 
145

 
0.50

Total interest-bearing liabilities
 
4,643,290

 
8,881

 
0.76
%
 
4,323,756

 
6,316

 
0.58
%
Noninterest-bearing demand deposits
 
1,333,266

 
 
 
 
 
1,151,240

 
 
 
 
Other noninterest-bearing liabilities
 
79,176

 
 
 
 
 
54,686

 
 
 
 
Stockholders’ equity
 
738,123

 
 
 
 
 
660,585

 
 
 
 
Total liabilities and stockholders’ equity
 
$
6,793,855

 
 
 
 
 
$
6,190,267

 
 
 
 
Excess of interest-earning assets over interest-bearing liabilities
 
$
1,067,189

 
 
 
 
 
$
839,823

 
 
 
 
Net interest and dividend income
 
 
 
$
56,129

 
 
 
 
 
$
49,021

 
 
Interest rate spread
 
 
 
 
 
3.81
%
 
 
 
 
 
3.74
%
Net interest margin
 
 
 
 
 
3.95
%
 
 
 
 
 
3.84
%
(1) 
Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis using a 35% effective tax rate.
(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 and securities sold under agreement to repurchase.


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Nine months ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
Average
Balance
 
Interest
 
Yield/
Rate (1)
 
Average
Balance
 
Interest
 
Yield/
Rate (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
 
$
1,411,503

 
$
52,934

 
5.01
%
 
$
1,221,797

 
$
44,700

 
4.89
%
Residential real estate loans
 
275,020

 
12,707

 
6.16

 
279,387

 
13,563

 
6.47

Commercial loans
 
2,432,837

 
85,366

 
4.72

 
2,057,839

 
69,364

 
4.54

Consumer loans
 
482,008

 
17,326

 
4.81

 
381,276

 
12,652

 
4.43

Loans held for sale
 
31,988

 
925

 
3.86

 
34,945

 
115

 
0.44

Total loans
 
4,633,356

 
169,258

 
4.90

 
3,975,244

 
140,394

 
4.74

Mortgage-backed securities (3)
 
784,125

 
14,132

 
2.40

 
724,978

 
11,658

 
2.14

Investment securities (3)
 
187,747

 
3,524

 
3.71

 
203,616

 
3,660

 
3.51

Other interest-earning assets
 
37,664

 
1,256

 
4.45

 
32,694

 
1,174

 
4.79

Total interest-earning assets
 
5,642,892

 
188,170

 
4.51
%
 
4,936,532

 
156,886

 
4.31
%
Allowance for loan losses
 
(40,646
)
 
 
 
 
 
(37,987
)
 
 
 
 
Cash and due from banks
 
130,537

 
 
 
 
 
144,420

 
 
 
 
Cash in non-owned ATMs
 
604,892

 
 
 
 
 
481,570

 
 
 
 
Bank-owned life insurance
 
101,952

 
 
 
 
 
91,208

 
 
 
 
Other noninterest-earning assets
 
345,514

 
 
 
 
 
224,798

 
 
 
 
Total assets
 
$
6,785,141

 
 
 
 
 
$
5,840,541

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
924,609

 
$
1,444

 
0.31
%
 
$
802,117

 
$
794

 
0.13
%
Money market
 
1,311,967

 
3,314

 
0.51

 
1,120,831

 
2,387

 
0.28

Savings
 
575,676

 
753

 
0.26

 
458,542

 
431

 
0.13

Customer time deposits
 
562,435

 
3,338

 
0.79

 
564,240

 
2,369

 
0.56

Total interest-bearing customer deposits
 
3,374,687

 
8,849

 
0.35

 
2,945,730

 
5,981

 
0.27

Brokered certificates of deposit
 
194,275

 
1,429

 
0.98

 
180,066

 
753

 
0.56

Total interest-bearing deposits
 
3,568,962

 
10,278

 
0.39

 
3,125,796

 
6,734

 
0.29

FHLB of Pittsburgh advances
 
744,939

 
6,057

 
1.09

 
719,121

 
3,397

 
0.63

Trust preferred borrowings
 
67,011

 
1,418

 
2.83

 
67,011

 
1,183

 
2.36

Senior debt
 
146,267

 
6,049

 
5.51

 
93,900

 
4,236

 
6.01

Other borrowed funds (4)
 
133,863

 
822

 
0.82

 
135,596

 
545

 
0.54

Total interest-bearing liabilities
 
4,661,042

 
24,624

 
0.71
%
 
4,141,424

 
16,095

 
0.52
%
Noninterest-bearing demand deposits
 
1,331,417

 
 
 
 
 
1,027,746

 
 
 
 
Other noninterest-bearing liabilities
 
75,744

 
 
 
 
 
51,605

 
 
 
 
Stockholders’ equity
 
716,938

 
 
 
 
 
619,766

 
 
 
 
Total liabilities and stockholders’ equity
 
$
6,785,141

 
 
 
 
 
$
5,840,541

 
 
 
 
Excess of interest-earning assets over interest-bearing liabilities
 
$
981,850

 
 
 
 
 
$
795,108

 
 
 
 
Net interest and dividend income
 
 
 
$
163,546

 
 
 
 
 
$
140,791

 
 
Interest rate spread
 
 
 
 
 
3.80
%
 
 
 
 
 
3.79
%
Net interest margin
 
 
 
 
 
3.93
%
 
 
 
 
 
3.87
%
(1) 
Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis using a 35% effective tax rate.
(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 and securities sold under agreement to repurchase.



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During the three months ended September 30, 2017, net interest income increased $7.1 million, or 14% from the three months ended September 30, 2016. Net interest margin was 3.95% for the third quarter of 2017, an 11 basis point increase compared to 3.84% for the third quarter of 2016. The increase in net interest margin includes the positive effects from the overall higher short-term interest rate environment, our acquisition of Penn Liberty Financial Corp. (Penn Liberty), disciplined pricing of loans and deposits, and the redemption of $55.0 million of the 2012 senior notes in late third quarter 2017, partially offset by the negative impact of lower purchased loan accretion from previous acquisitions (excluding Penn Liberty).
During the nine months ended September 30, 2017, net interest income increased $22.8 million, or 16% from the nine months ended September 30, 2016, and the net interest margin was 3.93%, a 6 basis point increase compared to 3.87% for the nine months ended September 30, 2016. These year-over-year increases reflect the positive effects of our acquisition of Penn Liberty, disciplined pricing of loans and deposits, and impact of purchased loan accretion from recent acquisitions.
Provision/Allowance for Loan Losses
We maintain an allowance for loan losses at an appropriate level based on our assessment of estimable and probable losses in the loan portfolio. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments. For the three months ended September 30, 2017 and 2016, we recorded a provision for loan losses of $2.9 million and $5.8 million, respectively, and for the nine months ended September 30, 2017 and 2016, we recorded a provision for loan losses of $6.9 million and $7.9 million, respectively. Provision for the third quarter of 2017 decreased $2.9 million from the third quarter of 2016, as the third quarter of 2016 included $3.0 million of provision expense related to resolution of a large longstanding problem loan.
Our allowance for loan losses is based on 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. In addition, regional economic conditions are taken into consideration. See Note 6 to the Consolidated Financial Statements for additional information.
The allowance for loan losses was $40.2 million at September 30, 2017 and $39.8 million at December 31, 2016. The allowance for loan losses and provision reflects the addition of reserves related to an increase of $227.0 million in total net loans (excluding reverse mortgages) at September 30, 2017 when compared to December 31, 2016 as well as loan downgrades, offset by payoff activity and improvement in qualitative adjustment factors due to continued improvement of economic conditions and continued favorable credit quality metrics. The ratio of allowance for loan losses to total gross loans was 0.86% at September 30, 2017 and 0.89% at December 31, 2016. This ratio excluding the impact of all purchased loans would have been 0.99% at September 30, 2017 and 1.08% at December 31, 2016.

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The table below represents a summary of changes in the allowance for loan losses for the nine months ended September 30, 2017 and 2016, respectively.
 
 
 
Nine months ended September 30,
(Dollars in thousands)
 
2017
 
2016
Beginning balance
 
$
39,751

 
$
37,089

Provision for loan losses
 
6,901

 
7,862

Charge-offs:
 
 
 
 
Commercial
 
3,787

 
4,643

Owner-occupied commercial
 
296

 
1,556

Commercial real estate
 
1,702

 
79

Construction
 
346

 
59

Residential real estate
 
112

 
72

Consumer
 
2,017

 
1,422

Overdrafts
 
589

 
545

Total charge-offs
 
8,849

 
8,376

Recoveries:
 
 
 
 
Commercial
 
820

 
557

Owner-occupied commercial
 
120

 
66

Commercial real estate
 
69

 
310

Construction
 
305

 
486

Residential real estate
 
141

 
112

Consumer
 
731

 
709

Overdrafts
 
212

 
213

Total recoveries
 
2,398

 
2,453

Net charge-offs
 
6,451

 
5,923

Ending balance
 
$
40,201

 
$
39,028

Net charge-offs to average gross loans outstanding, net of unearned income (1)
 
0.19
%
 
0.20
%
(1) Annualized, excludes loans held for sale and reverse mortgages
 
 
 
 
Noninterest (Fee) Income
During the third quarter of 2017, the Company earned fee income of $32.4 million, an increase of $4.9 million, or 18%, compared to $27.6 million in the third quarter of 2016. This increase is primarily due to a $2.7 million increase in investment management and fiduciary income due to growth in several business lines in our Wealth Management segment, an increase of $1.6 million in credit/debit card and ATM income and a $0.5 million increase in other fee income due to expanded revenue sources in our Cash Connect® business, as well as a $0.4 million gain on the sale of Small Business Administration (SBA) loans. These increases were partially offset by a decline of $0.8 million in mortgage banking-related fee income due to reduced mortgage volume in the higher rate environment compared to 2016.
For the nine months ended September 30, 2017, our fee income was $92.2 million, an increase of $15.4 million, or 20%, compared to $76.8 million in the third quarter of 2016. This increase is primarily due to a $8.1 million increase in investment management and fiduciary income due to growth in several business lines in our Wealth Management segment, an increase of $4.5 million in credit/debit card and ATM income and a $1.4 million increase in other fee income due to expanded revenue sources and continued growth in our Cash Connect® business, as well as a $1.2 million increase attributable to gains on the sale of SBA loans.
Noninterest Expense
Noninterest expense for the third quarter of 2017 was $54.2 million, an increase of $2.9 million, or 6%, from $51.2 million in the third quarter of 2016, primarily the result of ongoing operating costs from our late 2016 combinations with Penn Liberty, Powdermill, and West Capital.

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For the nine months ended September 30, 2017, noninterest expense was $158.4 million, an increase of $18.7 million, or 13% from $139.7 million at September 30, 2016. The increase was primarily due to $10.9 million in additional year-over-year ongoing operating costs from recent acquisitions. The remaining increase primarily reflects higher compensation and related costs due to added staff to support overall franchise growth.
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, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded an income tax expense of $10.9 million and $30.4 million during the three and nine months ended September 30, 2017, respectively, compared to an income tax expense of $6.8 million and $24.0 million for the same periods in 2016.
Our effective tax rate was 34.7% and 33.6% for the three and nine months ended September 30, 2017 compared to 34.9% and 34.3% during the same periods in 2016. The effective tax rate for the nine months ended September 30, 2017 decreased due to the tax benefit related to stock-based compensation activity during the year, due to both the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718) during the second quarter of 2016, as well as higher tax benefits realized on stock-based compensation activity during the nine months ended September 30, 2017, due to greater transaction volume and increases in the Company’s stock price. The tax benefits recognized during the three and nine months ended September 30, 2017 were $0.3 million and $1.9 million, respectively, compared to tax benefits of $0.2 million and $1.0 million for the three and nine months ended September 30, 2016.
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, excess tax benefits from recognized stock compensation, and BOLI income. 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.
Contractual Obligations
Our contractual obligations at September 30, 2017 did not significantly change from our contractual obligations at December 31, 2016, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, and at March 31, 2017, which are disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE
The following table provides a reconciliation of tangible common 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.
 
(Dollars and share amounts in thousands, except per share amounts)
 
September 30, 2017
 
December 31, 2016
Stockholders’ equity
 
$
740,861

 
$
687,336

Less: Goodwill and other intangible assets
 
189,116

 
191,247

Tangible common equity (numerator)
 
$
551,745

 
$
496,089

Shares of common stock outstanding (denominator)
 
31,410

 
31,390

Book value per share of common stock
 
$
23.59

 
$
21.90

Goodwill and other intangible assets
 
6.02

 
6.10

Tangible book value per share of common stock
 
$
17.57

 
$
15.80



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Table of Contents

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 used to determine the allowance for loan losses, deferred taxes, fair value measurements, 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 assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2017, 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.
For further discussion of our critical accounting estimates, see the "Management's Discussion and Analysis - Critical Accounting Estimates" section of our Annual Report on Form 10-K for the year ended December 31, 2016.

RECENT LEGISLATION
General
As a federally chartered savings institution the Bank is subject to regulation by the Federal Housing Finance Agency (FHFA), an independent agency in the executive branch of the U.S. government, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC), collectively referred to as the Federal banking agencies. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OCC periodically examines the Bank for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of the Bank. The Bank is required to file periodic reports with the OCC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the FHFA and the Federal Reserve.
Basel III
In 2013, the Federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision capital guidelines for U.S. banking organizations. Under the final rules as of January 2015, minimum requirements increased for both the quantity and quality of capital maintained by the Company and the Bank. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of total capital to risk-weighted assets of 10.0%, and required a minimum Tier 1 leverage ratio of 4.0%. The final rule also established a new capital conservation buffer, comprised of common equity Tier 1 capital, above the regulatory minimum capital requirements. The phase-in of the capital conservation buffer began on January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. For 2017, the capital conservation buffer is 1.25%. The final rules also revised the standards for an insured depository institution to be “well-capitalized” under the banking agencies’ prompt corrective action framework, requiring a common equity Tier 1 capital ratio of 6.5%, Tier 1 capital ratio of 8.0% and total capital ratio of 10.0%, while leaving unchanged the existing 5.0% leverage ratio requirement. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. Newly issued trust preferred securities and cumulative perpetual preferred stock may no longer be included in Tier 1 capital. However, for depository institution holding companies of less than $15 billion in total consolidated assets, such as the Company, most outstanding trust preferred securities and other non-qualifying securities issued prior to May 19, 2010 are permanently grandfathered to be included in Tier 1 capital (up to a limit of 25% of Tier 1 capital, excluding non-qualifying capital instruments). As of September 30, 2017, we had approximately $67.0 million of trust preferred securities outstanding, all of which are counted as Tier 1 capital.
The phase-in period for the final rules began for us on January 1, 2015. Full compliance with all of the final rule’s requirements phased in over a multi-year schedule is required by January 1, 2019. As of September 30, 2017, the Company and the Bank met the applicable standards, and the Bank was “well-capitalized” under the prompt corrective action rules.
In 2014, the Federal banking agencies adopted a “liquidity coverage ratio” requirement (LCR) for large internationally active banking organizations, and in 2016, the agencies proposed a “net stable funding ratio” standard (NSFR) for the same group of institutions. The LCR measures an organizations’ ability to meet liquidity demands over a 30-day horizon; the NSFR would test the same capacity over a one-year horizon. Neither requirement applies directly to the Company or the Bank, but the policies embedded in them may inform the work of the examiners as they consider our liquidity.


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Item 3.     Quantitative and Qualitative Disclosures About Market Risk
Incorporated herein by reference from Item 2 Part I (Interest Rate Sensitivity) of this Quarterly Report on Form 10-Q.


Item 4.     Controls and Procedures
 
(a)
Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 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 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. During the three months ended September 30, 2017, 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.


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Part II. OTHER INFORMATION

Item 1.    Legal Proceedings
Incorporated herein by reference to Note 16 – Legal and Other Proceedings to the Consolidated Financial Statements
 

Item 1A.    Risk Factors

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, 2016, previously filed with the Securities and Exchange Commission.
 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2017.
 
2017
 
Total Number
of Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)
July
 
20,000

 
$
45.71

 
20,000

 
801,194

August
 
18,000

 
44.05

 
18,000

 
783,194

September
 
33,000

 
44.61

 
33,000

 
750,194

Total
 
71,000

 
$
44.78

 
71,000

 
 
(1) 
During the fourth quarter of 2015, the Board of Directors of the Company approved a stock buyback program of up to 5% of then-outstanding shares of common stock. Under the program, purchases may be made from time to time in the open market or through negotiated transactions, subject to market conditions and other factors, and in accordance with applicable securities laws. There is no fixed termination date for the repurchase program, and the repurchase program may be suspended or discontinued at any time.


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Item 3.    Defaults upon Senior Securities
None.
 

Item 4.    Mine Safety Disclosures
Not applicable.
 

Item 5.    Other Information
None.
Item 6. Exhibits
 
(a)
(b)
(c)
(d)
Exhibit 101.INS – XBRL Instance Document
(e)
Exhibit 101.SCH – XBRL Schema Document
(f)
Exhibit 101.CAL – XBRL Calculation Linkbase Document
(g)
Exhibit 101.LAB – XBRL Labels Linkbase Document
(h)
Exhibit 101.PRE – XBRL Presentation Linkbase Document
(i)
Exhibit 101.DEF – XBRL Definition Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
WSFS FINANCIAL CORPORATION
 
 
 
Date: November 8, 2017
 
/s/ Mark A. Turner
 
 
Mark A. Turner
 
 
Chairman, President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: November 8, 2017
 
/s/ Dominic C. Canuso
 
 
Dominic C. Canuso
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

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