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

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
___________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
 
WSFS Bank Center, 500 Delaware Avenue, Wilmington, Delaware 19801
(Address of principal executive offices)
 
(302) 792-6000
Registrant’s telephone number, including area code:
___________________________________________
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  ☒    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  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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
 
  
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  ☒
The Registrant had 31,452,055 shares of common stock, par value $0.01 per share, outstanding at May 5, 2017.
 


Table of Contents

WSFS FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
PART I. Financial Information
 
 
Page
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
PART II. Other Information
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
Exhibit 31.1
 
 
 
 
Exhibit 31.2
 
 
 
 
Exhibit 32
 
 
 
 
Exhibit 101.INS
Instance Document
 
Exhibit 101.SCH
Schema Document
 
Exhibit 101.CAL
Calculation Linkbase Document
 
Exhibit 101.LAB
Labels Linkbase Document
 
Exhibit 101.PRE
Presentation Linkbase Document
 
Exhibit 101.DEF
Definition Linkbase Document
 

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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;

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regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its shareholders;
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. 
Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation 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 required by law.



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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(Dollars in thousands, except per share data)
 
(Unaudited)
Interest income:
 
 
 
 
Interest and fees on loans
 
$
54,681

 
$
44,562

Interest on mortgage-backed securities
 
4,395

 
3,894

Interest and dividends on investment securities:
 
 
 
 
Taxable
 
117

 
77

Tax-exempt
 
1,132

 
1,143

Other interest income
 
501

 
370

 
 
60,826

 
50,046

Interest expense:
 
 
 
 
Interest on deposits
 
3,075

 
2,118

Interest on senior debt
 
2,121

 
942

Interest on Federal Home Loan Bank advances
 
1,858

 
1,048

Interest on federal funds purchased and securities sold under agreements to repurchase
 
201

 
182

Interest on trust preferred borrowings
 
446

 
371

Interest on other borrowings
 
22

 
29

 
 
7,723

 
4,690

Net interest income
 
53,103

 
45,356

Provision for loan losses
 
2,162

 
780

Net interest income after provision for loan losses
 
50,941

 
44,576

Noninterest income:
 
 
 
 
Credit/debit card and ATM income
 
8,131

 
6,901

Investment management and fiduciary income
 
8,039

 
5,254

Deposit service charges
 
4,397

 
4,276

Mortgage banking activities, net
 
1,185

 
1,654

Securities gains, net
 
320

 
305

Loan fee income
 
549

 
477

Bank owned life insurance income
 
275

 
231

Other income
 
5,196

 
4,570

 
 
28,092

 
23,668

Noninterest expense:
 
 
 
 
Salaries, benefits and other compensation
 
28,836

 
22,876

Occupancy expense
 
5,162

 
4,270

Equipment expense
 
3,124

 
2,473

Professional fees
 
1,635

 
2,403

Data processing and operations expenses
 
1,618

 
1,542

Marketing expense
 
624

 
664

Loan workout and OREO expenses
 
521

 
503

FDIC expenses
 
529

 
838

Corporate development expense
 
338

 
569

Other operating expense
 
9,119

 
7,659

 
 
51,506

 
43,797

Income before taxes
 
27,527

 
24,447

Income tax provision
 
8,590

 
8,677

Net income
 
$
18,937

 
$
15,770

Earnings per share:
 
 
 
 
Basic
 
$
0.60

 
$
0.53

Diluted
 
$
0.59

 
$
0.52

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 March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Net Income
 
$
18,937

 
$
15,770

Other comprehensive income:
 
 
 
 
Net change in unrealized gains on investment securities available for sale
 
 
 
 
Net unrealized gains arising during the period, net of tax expense of $779 and $6,479, respectively
 
1,272

 
10,572

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $114 and $116, respectively
 
(206
)
 
(189
)
 
 
1,066

 
10,383

Net change in securities held to maturity
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $59 and $65, respectively
 
(101
)
 
(103
)
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 ($12) and $306, respectively
 
(23
)
 
478

Net change in cash flow hedge
 
 
 
 
Net unrealized loss arising during the period, net of tax benefit of ($69) and $0, respectively
 
(112
)
 

Total other comprehensive income
 
830

 
10,758

Total comprehensive income
 
$
19,767

 
$
26,528

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
 
 
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands, except per share and share data)
 
(Unaudited)
Assets:
 
 
 
 
Cash and due from banks
 
$
120,913

 
$
119,929

Cash in non-owned ATMs
 
730,747

 
698,454

Interest-bearing deposits in other banks including collateral of $3,380 at March 31, 2017 and December 31, 2016
 
3,603

 
3,540

Total cash and cash equivalents
 
855,263

 
821,923

Investment securities, available for sale (amortized cost of $800,612 at March 31, 2017 and $807,761 at December 31, 2016)
 
789,125

 
794,543

Investment securities, held to maturity-at cost (fair value of $163,241 at March 31, 2017 and $163,232 at December 31, 2016)
 
163,611

 
164,346

Loans, held for sale at fair value
 
29,394

 
54,782

Loans, net of allowance for loan losses of $39,826 at March 31, 2017 and $39,751 at December 31, 2016
 
4,552,151

 
4,444,375

Bank owned life insurance
 
101,700

 
101,425

Stock in Federal Home Loan Bank of Pittsburgh-at cost
 
20,002

 
38,248

Other real estate owned
 
3,582

 
3,591

Accrued interest receivable
 
16,712

 
17,027

Premises and equipment
 
49,194

 
48,871

Goodwill
 
165,960

 
167,539

Intangible assets
 
24,412

 
23,708

Other assets
 
81,793

 
84,892

Total assets
 
$
6,852,899

 
$
6,765,270

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
1,658,111

 
$
1,266,306

Interest-bearing demand
 
932,284

 
935,333

Money market
 
1,342,464

 
1,257,520

Savings
 
597,186

 
547,293

Time
 
321,325

 
332,624

Jumbo certificates of deposit – customer
 
248,861

 
260,560

Total customer deposits
 
5,100,231

 
4,599,636

Brokered deposits
 
276,599

 
138,802

Total deposits
 
5,376,830

 
4,738,438

Federal funds purchased and securities sold under agreements to repurchase
 
135,000

 
130,000

Federal Home Loan Bank advances
 
298,095

 
854,236

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
152,177

 
152,050

Other borrowed funds
 
48,566

 
64,150

Accrued interest payable
 
2,931

 
1,151

Other liabilities
 
68,288

 
70,898

Total liabilities
 
6,148,898

 
6,077,934

Stockholders’ Equity:
 
 
 
 
Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,125,000 at March 31, 2017 and 55,995,219 at December 31, 2016
 
581

 
580

Capital in excess of par value
 
331,371

 
329,457

Accumulated other comprehensive loss
 
(6,787
)
 
(7,617
)
Retained earnings
 
643,816

 
627,078

Treasury stock at cost, 24,667,145 shares at March 31, 2017 and 24,605,145 shares at December 31, 2016
 
(264,980
)
 
(262,162
)
Total stockholders’ equity
 
704,001

 
687,336

Total liabilities and stockholders’ equity
 
$
6,852,899

 
$
6,765,270

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

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars and share data in thousands)
 
Shares
 
Common Stock
 
Capital in Excess of Par Value
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Shareholders' Equity
Balance, December 31, 2015
 
55,945,245

 
$
560

 
$
256,435

 
$
696

 
$
570,630

 
$
(247,850
)
 
$
580,471

Net Income
 

 

 

 

 
15,770

 

 
15,770

Other comprehensive income
 

 

 

 
10,758

 

 

 
10,758

Cash dividend, $0.06 per share
 

 

 

 

 
(1,783
)
 

 
(1,783
)
Issuance of common stock including proceeds from exercise of common stock options
 
61,498

 
1

 
659

 

 

 

 
660

Stock-based compensation expense
 

 

 
699

 

 

 

 
699

Repurchase of common stock, 301,871 shares
 

 

 

 

 

 
(8,995
)
 
(8,995
)
Balance, March 31, 2016
 
56,006,743

 
$
561

 
$
257,793

 
$
11,454

 
$
584,617

 
$
(256,845
)
 
$
597,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
55,995,219

 
$
580

 
$
329,457

 
$
(7,617
)
 
$
627,078

 
$
(262,162
)
 
$
687,336

Net Income
 

 

 

 

 
18,937

 

 
18,937

Other comprehensive income
 

 

 

 
830

 

 

 
830

Cash dividend, $0.07 per share
 

 

 

 

 
(2,199
)
 

 
(2,199
)
Issuance of common stock including proceeds from exercise of common stock options
 
129,781

 
1

 
1,093

 

 

 

 
1,094

Stock-based compensation expense
 

 

 
821

 

 

 

 
821

Repurchase of common stock, 62,000 shares
 

 

 

 

 

 
(2,818
)
 
(2,818
)
Balance, March 31, 2017
 
56,125,000

 
$
581

 
$
331,371

 
$
(6,787
)
 
$
643,816

 
$
(264,980
)
 
$
704,001


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
 
 
 
Three months ended March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net Income
 
$
18,937

 
$
15,770

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
2,162

 
780

Depreciation of premises and equipment, net
 
2,190

 
1,903

Amortization of fees and discounts, net
 
4,742

 
3,895

Amortization of intangible assets
 
857

 
549

Decrease in accrued interest receivable
 
315

 
48

Increase in other assets
 
(1,838
)
 
(3,534
)
Origination of loans held for sale
 
(85,833
)
 
(72,474
)
Proceeds from sales of loans held for sale
 
105,436

 
77,834

Gain on mortgage banking activities, net
 
(1,185
)
 
(1,654
)
Gain on sale of securities, net
 
(320
)
 
(305
)
Stock-based compensation expense
 
821

 
758

Increase in accrued interest payable
 
1,780

 
539

Decrease in other liabilities
 
(1,537
)
 
(7,930
)
Loss on sale of other real estate owned and valuation adjustments, net
 
39

 
76

Deferred income tax expense
 
3,190

 
3,293

Increase in value of bank owned life insurance
 
(275
)
 
(231
)
Increase in capitalized interest, net
 
(1,316
)
 
(1,193
)
Net cash provided by operating activities
 
$
48,165

 
$
18,124

Investing activities:
 
 
 
 
Purchases of investment securities held to maturity
 

 
(3,329
)
Repayments of investment securities held to maturity
 
250

 
1,335

Maturities and calls of investment securities held to maturity
 

 
400

Sale of investment securities available for sale
 
263,015

 
38,932

Purchases of investment securities available for sale
 
(375,687
)
 
(91,963
)
Repayments of investment securities available for sale
 
119,313

 
15,463

Net increase in loans
 
(106,933
)
 
(30,010
)
Purchases of stock of Federal Home Loan Bank of Pittsburgh
 
(54,990
)
 
(20,037
)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh
 
73,236

 
19,845

Sales of other real estate owned
 
1,707

 
1,442

Investment in premises and equipment
 
(2,480
)
 
(1,234
)
Net cash used for investing activities
 
$
(82,569
)
 
$
(69,156
)

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Three months ended March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Financing activities:
 
 
 
 
Net increase in demand and saving deposits
 
508,429

 
35,907

Decrease in time deposits
 
(22,998
)
 
(26,072
)
Increase in brokered deposits
 
137,797

 
43,353

Decrease in loan payable
 
(420
)
 
(407
)
Receipts from FHLB advances
 
42,415,835

 
28,349,212

Repayments of FHLB advances
 
(42,971,976
)
 
(28,310,900
)
Receipts from federal funds purchased and securities sold under agreement to repurchase
 
6,688,000

 
8,710,770

Repayments of federal funds purchased and securities sold under agreement to repurchase
 
(6,683,000
)
 
(8,711,445
)
Dividends paid
 
(2,199
)
 
(1,783
)
Issuance of common stock and exercise of common stock options
 
1,094

 
241

Purchase of treasury stock
 
(2,818
)
 
(8,995
)
Net cash provided by financing activities
 
$
67,744

 
$
79,881

Increase in cash and cash equivalents
 
33,340

 
28,849

Cash and cash equivalents at beginning of period
 
821,923

 
561,179

Cash and cash equivalents at end of period
 
$
855,263

 
$
590,028

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest during the period
 
$
5,943

 
$
4,151

Cash (received) paid for income taxes, net
 
(1,199
)
 
9,554

Loans transferred to other real estate owned
 
1,737

 
417

Loans transferred to portfolio from held-for-sale at fair value
 
6,470

 
1,510

Net change in accumulated other comprehensive income
 
830

 
10,758

Non-cash goodwill adjustments, net
 
(1,579
)
 
(358
)
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 MONTHS ENDED MARCH 31, 2017
(UNAUDITED)
1. BASIS OF PRESENTATION
General
Our unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (the Company, our Company, we, our or us), Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital) and Cypress Capital Management, LLC (Cypress). We also have one unconsolidated subsidiary, WSFS Capital Trust III (the Capital Trust). WSFS Bank has three wholly-owned subsidiaries: WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC (Monarch).
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 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. Whenever necessary, reclassifications have been made to the prior period Consolidated Financial Statements to conform to the current period’s presentation. 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 June 13, 2016, the Company issued $100.0 million of senior unsecured fixed-to-floating rate notes. The senior unsecured 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 senior unsecured 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 notes are being used for general corporate purposes.

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In 2012, we issued and sold $55.0 million in aggregate principal amount of 6.25% senior notes due 2019 (the “2012 senior debt”). The 2012 senior debt is unsecured and ranks equally with all of our other present and future unsecured unsubordinated obligations. The 2012 senior debt is effectively subordinated to our secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries. At our option, the 2012 senior debt is callable, in whole or in part, on September 1, 2017, or on any scheduled interest payment date thereafter, at a price equal to the outstanding principal amount to be redeemed plus accrued and unpaid interest. The 2012 senior debt matures on September 1, 2019.
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. We expect this acquisition 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
The Consolidated Statements of Income for the quarter ended March 31, 2016 has been revised to correct an immaterial error in Noninterest income - Other revenue and Noninterest expense - Other operating expense related to revenue earned for cash servicing fees. As a result, the Consolidated Statement of Income has been revised to reflect these changes, as follows:
 
 
Three months ended March 31, 2016
 
 
As originally reported
 
Adjustments
 
As revised
Noninterest income - Other revenue
 
$
3,972

 
$
598

 
$
4,570

Noninterest expense - Other operating expense
 
7,061

 
598

 
7,659

The above revision 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 with no impact to our Consolidated Financial statements, as the standard is applied on a prospective basis.

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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.
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 with no impact to our Consolidated Financial statements, as the standard is applied on a prospective basis.
Accounting Guidance Pending Adoption at March 31, 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 Accounting Standards Codification (“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 is currently in the process of evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on the Company’s Consolidated Financial Statements. Our preliminary evaluation suggests that adoption of this guidance is not expected to have a material effect on our Consolidated Financial Statements. The Company anticipates completing our assessment in the second half of 2017.

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 does not expect the 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 is currently evaluating the impact of adopting ASU 2016-02 on its Consolidated Financial Statements.
 

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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 is currently evaluating the impact of this guidance on its Consolidated Financial Statements.

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 (“the EITF”) 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 is currently evaluating the impact of this guidance 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 a material 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 (“Step 2”). 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.
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 are preliminary estimates and are subject to adjustment during the one-year measurement period after the acquisition.
In connection with the merger, 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
483,482

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
12,092

Total assets
624,405

Liabilities assumed:
 
Deposits
568,706

Other borrowings
10,000

Other liabilities
3,977

Total liabilities
582,683

Net assets acquired:
41,722

Goodwill resulting from acquisition of Penn Liberty
$
67,179


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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

Other assets
 
(1,447
)
Other liabilities
 
(1,068
)
Adjusted goodwill resulting from the acquisition of Penn Liberty as of March 31, 2017
 
$
67,179

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.
3. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
 
 
 
Three Months Ended March 31,
(Dollars and Shares in thousands, except per share data)
 
2017
 
2016
Numerator:
 
 
 
 
Net income
 
$
18,937

 
$
15,770

Denominator:
 
 
 
 
Weighted average basic shares
 
31,407

 
29,671

Dilutive potential common shares
 
942

 
558

Weighted average fully diluted shares
 
32,349

 
30,229

Earnings per share:
 
 
 
 
Basic
 
$
0.60

 
$
0.53

Diluted
 
$
0.59

 
$
0.52

Outstanding common stock equivalents having no dilutive effect
 
22

 
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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:
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
GSE
 
$
33,051

 
$
2

 
$
72

 
$
32,981

CMO
 
280,576

 
699

 
3,564

 
277,711

FNMA MBS
 
393,356

 
984

 
8,289

 
386,051

FHLMC MBS
 
65,228

 
204

 
1,261

 
64,171

GNMA MBS
 
27,767

 
275

 
445

 
27,597

Other investments
 
634

 

 
20

 
614

 
 
$
800,612

 
$
2,164

 
$
13,651

 
$
789,125

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)
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
163,611

 
$
646

 
$
1,016

 
$
163,241

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 $2.1 million and $2.2 million at March 31, 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 March 31, 2017 and December 31, 2016 are presented in the table below:
 
 
 
Available for Sale (1) (2)
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2017
 
 
 
 
Within one year
 
$
20,012

 
$
19,997

After one year but within five years
 
18,059

 
17,981

After five years but within ten years
 
210,595

 
205,242

After ten years
 
551,312

 
545,291

 
 
$
799,978

 
$
788,511

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 (2)
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2017
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
5,940

 
5,975

After five years but within ten years
 
10,482

 
10,511

After ten years
 
147,189

 
146,755

 
 
$
163,611

 
$
163,241

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 as of March 31, 2017 and December 31, 2016 which has no stated maturity.
(2) 
Actual maturities could differ
Mortgage-backed securities (MBS) 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 a prepayment penalty.
Investment securities with fair market values aggregating $615.8 million and $562.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2017 and December 31, 2016, respectively.
During the first three months of 2017, we sold $263.0 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and one security with an immaterial realized loss. During the first three months of 2016, we sold $38.9 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and no realized losses. The cost basis of all investment securities sales is based on the specific identification method.
As of March 31, 2017 and December 31, 2016, our investment securities portfolio had remaining unamortized premiums of $16.3 million and $18.0 million, respectively, and unaccreted discounts of $0.6 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 March 31, 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:
 
 
 
 
 
 
 
 
 
 
 
 
GSE
 
$
25,981

 
$
72

 
$

 
$

 
$
25,981

 
$
72

CMO
 
161,225

 
3,469

 
4,239

 
95

 
165,464

 
3,564

FNMA MBS
 
276,175

 
8,289

 

 

 
276,175

 
8,289

FHLMC MBS
 
41,765

 
1,261

 

 

 
41,765

 
1,261

GNMA MBS
 
16,236

 
445

 

 

 
16,236

 
445

Other investments
 
634

 
20

 

 

 
634

 
20

Total temporarily impaired investments
 
522,016

 
13,556

 
4,239

 
95

 
526,255

 
13,651

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
84,121

 
$
969

 
$
1,960

 
$
47

 
$
86,081

 
$
1,016

Total temporarily impaired investments
 
$
84,121

 
$
969

 
$
1,960

 
$
47

 
$
86,081

 
$
1,016

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


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At March 31, 2017, we owned investment securities totaling $612.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $14.7 million at March 31, 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 $1.0 million at March 31, 2017, were AA-rated or better at the time of purchase and remained investment grade at March 31, 2017. All securities were evaluated for OTTI at March 31, 2017 and December 31, 2016. The result of this evaluation showed no OTTI as of March 31, 2017 or December 31, 2016. The estimated weighted average duration of MBS was 5.34 years at March 31, 2017.

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5. LOANS
The following table shows our loan portfolio by category:
 
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Commercial and industrial
 
$
1,339,867

 
$
1,287,731

Owner-occupied commercial
 
1,092,292

 
1,078,162

Commercial mortgages
 
1,165,556

 
1,163,554

Construction
 
255,760

 
222,712

Residential (1)
 
281,760

 
289,611

Consumer
 
464,898

 
450,029

 
 
4,600,133

 
4,491,799

Less:
 
 
 
 
Deferred fees, net
 
8,156

 
7,673

Allowance for loan losses
 
39,826

 
39,751

Net loans
 
$
4,552,151

 
$
4,444,375

(1) Includes Reverse Mortgages, at fair value of $22.5 million at March 31, 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)
 
March 31, 2017
 
December 31, 2016
Outstanding principal balance
 
$
38,418

 
$
41,574

Carrying amount
 
30,783

 
33,104

Allowance for loan losses
 
464

 
510

The following table presents the changes in accretable yield on the acquired credit impaired loans for the three months ended March 31, 2017:
(Dollars in thousands)
 
Three months ended March 31, 2017
Balance at beginning of period
 
$
5,150

Accretion
 
(792
)
Reclassification from nonaccretable difference
 
(144
)
Additions/adjustments
 
(112
)
Disposals
 

 
 
$
4,102

 

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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, Accounting Standard Codification ("ASC") Contingencies (ASC 450) and Receivables (ASC 310). 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 three months ended March 31, 2017 and 2016, net charge-offs totaled $2.1 million or 0.19% of average loans annualized, and $0.3 million, or 0.03% 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. Probability of default is calculated based on the historical rate of migration to impaired status during the last 25 quarters. During the three months ended March 31, 2017, we increased the look-back period to 25 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 25 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,
The competitive environment, as it could impact loan structure and underwriting, and
Valuation complexity by segment.
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.

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Table of Contents

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 8 quarters as of March 31, 2017. Our residential mortgage and consumer LEP remained at 4 quarters as of March 31, 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.
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 improvement in the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance of 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 months ended March 31, 2017:
 
 
Three months ended March 31, 2017
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
13,339

 
$
6,588

 
$
8,915

 
$
2,838

 
$
2,059

 
$
6,012

 
$
39,751

Charge-offs
 
(1,255
)
 
(192
)
 
(104
)
 
(14
)
 
(11
)
 
(1,143
)
 
(2,719
)
Recoveries
 
84

 
75

 
46

 
2

 
120

 
305

 
632

Provision (credit)
 
1,949

 
(441
)
 
(518
)
 
158

 
(114
)
 
1,080

 
2,114

Provision for acquired loans
 
88

 

 
(4
)
 
(23
)
 

 
(13
)
 
48

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$
6,241

 
$
39,826

Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
1,860

 
$

 
$
1,395

 
$
500

 
$
887

 
$
194

 
$
4,836

Loans collectively evaluated for impairment
 
12,165

 
6,015

 
6,763

 
2,397

 
1,144

 
6,042

 
34,526

Acquired loans evaluated for impairment
 
180

 
15

 
177

 
64

 
23

 
5

 
464

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$
6,241

 
$
39,826

Period-end loan balances evaluated for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment (2)
 
$
16,767

 
$
4,020

 
$
9,771

 
$
3,130

 
$
14,280

 
$
9,029

 
$
56,997

Loans collectively evaluated for impairment
 
1,175,911

 
919,508

 
928,925

 
225,718

 
158,430

 
405,285

 
3,813,777

Acquired nonimpaired loans
 
141,933

 
156,724

 
216,410

 
24,540

 
85,679

 
50,321

 
675,607

Acquired impaired loans
 
5,256

 
12,040

 
10,450

 
2,372

 
866

 
263

 
31,247

Ending balance (3)
 
$
1,339,867

 
$
1,092,292

 
$
1,165,556

 
$
255,760

 
$
259,255

 
$
464,898

 
$
4,577,628

(1) 
Period-end loan balance excludes Reverse Mortgages, at fair value of $22.5 million.
(2) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $17.3 million for the period ending March 31, 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 months ended March 31, 2016:
 
 
Three months ended March 31, 2016
(Dollars in thousands)
 
Commercial
 
Owner -
occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Complexity Risk(2)
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
11,156

 
$
6,670

 
$
6,487

 
$
3,521

 
$
2,281

 
$
5,964

 
$
1,010

 
$
37,089

Charge-offs
 
(179
)
 

 
(17
)
 
(26
)
 
(14
)
 
(631
)
 

 
(867
)
Recoveries
 
110

 
38

 
79

 
46

 
22

 
259

 

 
554

Provision (credit)
 
484

 
(6
)
 
(37
)
 
72

 
(20
)
 
400

 
14

 
907

Provision for acquired loans
 
(89
)
 

 
4

 
(4
)
 

 
(38
)
 

 
(127
)
Ending balance
 
$
11,482

 
$
6,702

 
$
6,516

 
$
3,609

 
$
2,269

 
$
5,954

 
$
1,024

 
$
37,556

Period-end allowance allocated to:
Loans individually evaluated for impairment
 
$
1,473

 
$

 
$

 
$
211

 
$
911

 
$
208

 
$

 
$
2,803

Loans collectively evaluated for impairment
 
10,005

 
6,680

 
6,427

 
3,398

 
1,354

 
5,746

 
1,024

 
34,634

Acquired loans evaluated for impairment
 
4

 
22

 
89

 

 
4

 

 

 
119

Ending balance
 
$
11,482

 
$
6,702

 
$
6,516

 
$
3,609

 
$
2,269

 
$
5,954

 
$
1,024

 
$
37,556

Period-end loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment (3)
 
$
5,278

 
$
1,270

 
$
2,678

 
$
1,419

 
$
15,260

 
$
7,795

 
$

 
$
33,700

Loans collectively evaluated for impairment
 
957,863

 
839,819

 
893,036

 
194,654

 
161,610

 
336,053

 

 
3,383,035

Acquired nonimpaired loans
 
107,380

 
49,765

 
80,795

 
27,711

 
73,240

 
15,803

 

 
354,694

Acquired impaired loans
 
12,600

 
4,603

 
10,557

 
3,564

 
955

 
5

 

 
32,284

Ending balance (4)
 
$
1,083,121

 
$
895,457

 
$
987,066

 
$
227,348

 
$
251,065

 
$
359,656

 
$

 
$
3,803,713

 
(1) 
Period-end loan balance excludes Reverse Mortgages, at fair value of $24.7 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 $13.9 million for the period ending March 31, 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
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.

24

Table of Contents

The following tables show our nonaccrual and past due loans at the dates indicated:

 
 
March 31, 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
 
$
783

 
$
467

 
$

 
$
1,250

 
$
1,316,841

 
$
5,256

 
$
16,520

 
$
1,339,867

Owner-occupied commercial
 
341

 
500

 

 
841

 
1,075,391

 
12,040

 
4,020

 
1,092,292

Commercial mortgages
 
451

 

 
343

 
794

 
1,144,617

 
10,450

 
9,695

 
1,165,556

Construction
 
37

 

 
466

 
503

 
252,885

 
2,372

 

 
255,760

Residential(1)
 
2,020

 
119

 
850

 
2,989

 
250,443

 
866

 
4,957

 
259,255

Consumer
 
374

 
612

 
106

 
1,092

 
459,057

 
263

 
4,486

 
464,898

Total (2)
 
$
4,006

 
$
1,698

 
$
1,765

 
$
7,469

 
$
4,499,234

 
$
31,247

 
$
39,678

 
$
4,577,628

% of Total Loans
 
0.08
%
 
0.04
%
 
0.04
%
 
0.16
%
 
98.29
%
 
0.68
%
 
0.87
%
 
100
%
(1) 
Residential accruing current balances excludes Reverse Mortgages at fair value of $22.5 million.
(2) 
The balances above include a total of $675.6 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
%
 
98.56
%
 
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
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.

25

Table of Contents

The following tables provide an analysis of our impaired loans at March 31, 2017 and December 31, 2016:
 
 
 
March 31, 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
 
$
18,550

 
$
2,598

 
$
15,952

 
$
2,040

 
$
20,197

 
$
7,535

Owner-occupied commercial
 
6,210

 
4,020

 
2,190

 
15

 
6,372

 
4,155

Commercial mortgages
 
14,478

 
4,220

 
10,258

 
1,572

 
19,906

 
9,288

Construction
 
4,435

 
1,117

 
3,318

 
564

 
4,546

 
2,979

Residential
 
15,000

 
8,056

 
6,944

 
910

 
17,904

 
14,941

Consumer
 
9,070

 
7,526

 
1,544

 
199

 
11,578

 
8,191

Total (2)
 
$
67,743

 
$
27,537

 
$
40,206

 
$
5,300

 
$
80,503

 
$
47,089

(1) 
Reflects loan balances at or written down to their remaining book balance.
(2) 
The above includes acquired impaired loans totaling $10.7 million in the ending loan balance and $11.8 million in the contractual principal balance.
 
 
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.
Interest income of $0.3 million and $0.2 million was recognized on impaired loans during the three months ended March 31, 2017 and March 31, 2016, respectively.
As of March 31, 2017, there were 39 residential loans and 7 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.9 million and $2.2 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.
Reserves on Acquired Nonimpaired Loans
In accordance with FASB ASC 310, loans acquired by the Bank through its mergers with FNBW, 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.

26

Table of Contents

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.
Commercial Credit Exposure
 
 
 
March 31, 2017
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Total
Commercial(1)
 
 
 
 
 
 
 
 
 
 
Amount
 
%
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
Special mention
 
$
17,590

 
$
6,849

 
$
21,931

 
$
1,008

 
$
47,378

 
 
Substandard:
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
41,136

 
20,162

 
3,216

 
4,489

 
69,003

 
 
Nonaccrual
 
14,660

 
4,020

 
8,300

 

 
26,980

 
 
Doubtful
 
1,860

 

 
1,395

 

 
3,255

 
 
Total Special Mention and Substandard
 
75,246

 
31,031

 
34,842

 
5,497

 
146,616

 
4
%
Acquired impaired
 
5,256

 
12,040

 
10,450

 
2,372

 
30,118

 
1
%
Pass
 
1,259,365

 
1,049,221

 
1,120,264

 
247,891

 
3,676,741

 
95
%
Total
 
$
1,339,867

 
$
1,092,292

 
$
1,165,556

 
$
255,760

 
$
3,853,475

 
100
%
(1) 
 Table includes $539.6 million of acquired nonimpaired loans as of March 31, 2017.


27

Table of Contents

 
 
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)
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31, 2017
 
December 31, 2016
 
 
2017
 
2016
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Nonperforming(1)
 
$
14,280

 
$
13,547

 
$
9,030

 
$
7,863

 
$
23,310

 
3
%
 
$
21,410

 
3
%
Acquired impaired loans
 
866

 
860

 
263

 
369

 
1,129

 
%
 
1,229

 
%
Performing
 
244,109

 
252,621

 
455,605

 
441,797

 
699,714

 
97
%
 
694,418

 
97
%
Total
 
$
259,255

 
$
267,028

 
$
464,898

 
$
450,029

 
$
724,153

 
100
%
 
$
717,057

 
100
%
(1) 
Includes $13.7 million as of March 31, 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 $22.5 million and $22.6 million of Reverse Mortgages at fair value as of March 31, 2017 and December 31, 2016, respectively.
(3) 
Total includes $136.0 million and $150.5 million in acquired nonimpaired loans as of March 31, 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)
The following table presents the balance of TDRs as of the indicated dates:
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Performing TDRs
 
$
17,260

 
$
14,336

Nonperforming TDRs
 
10,778

 
8,451

    Total TDRs
 
28,038

 
22,787

Approximately $1.9 million and $1.3 million in related reserves have been established for these loans at March 31, 2017 and December 31, 2016, respectively.

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The following table presents information regarding the types of loan modifications made for the three months ended March 31, 2017:
(Dollars in thousands)
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other (1)
 
Total
Commercial
 
1

 

 

 
1

Owner-occupied commercial
 
1

 

 

 
1

Construction
 
2

 

 

 
2

Residential
 

 
1

 

 
1

Consumer
 

 
6

 
1

 
7

 
 
4

 
7

 
1

 
12

(1) 
Other includes underwriting exception.
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, typically six months and payment is reasonably assured.
The following table presents loans identified as TDRs during the three months ended March 31, 2017 and 2016.
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
Commercial
 
$
443

 
$
443

 
$
984

 
$
984

Owner-occupied commercial
 
3,071

 
3,071

 

 

Commercial mortgages
 

 

 

 

Construction
 
1,712

 
1,712

 

 

Residential
 
242

 
242

 
614

 
614

Consumer
 
584

 
584

 
215

 
215

Total
 
$
6,052

 
$
6,052

 
$
1,813

 
$
1,813

During the three months ended March 31, 2017, the TDRs set forth in the table above increased our allowance for loan losses less than $0.3 million, and resulted in no additional charge-offs. For the same period of 2016, the TDRs set forth in the table above had no change on our allowance for loan losses allocation of the related reserve and resulted in charge-offs of less than $0.1 million. During the three months ended March 31, 2017, three TDRs defaulted that had received troubled debt modification during the past twelve months with a total loan amount $0.7 million.

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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 three months ended March 31, 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 the quarter 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
 
(1,635
)
 

 
56

 
(1,579
)
Goodwill from business combinations
 

 

 

 

March 31, 2017
 
$
145,761

 
$

 
$
20,199

 
$
165,960

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:
 
 
 
March 31, 2017
(Dollars in thousands)
 
Gross Intangible Assets
 
Accumulated Amortization
 
Net Intangible Assets
 
Amortization Period
Core deposits
 
$
10,658

 
$
(3,440
)
 
$
7,218

 
10 years
Customer relationships
 
17,561

 
(3,013
)
 
14,548

 
7-15 years
Non-compete agreements
 
221

 
(24
)
 
197

 
5 years
Loan servicing rights
 
1,821

 
(1,092
)
 
729

 
10-30 years
Favorable lease asset
 
1,932

 
(212
)
 
1,720

 
10 months-18 years
Total intangible assets
 
$
32,193

 
$
(7,781
)
 
$
24,412

 
 
 
 
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 three months ended March 31, 2017, we recognized amortization expense on other intangible assets of $0.9 million.

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The following table shows the estimated future amortization expense related to our intangible assets:
 
(Dollars in thousands)
 
Amortization
of Intangibles
Remaining in 2017
 
$
2,287

2018
 
2,965

2019
 
2,897

2020
 
2,701

2021
 
2,329

Thereafter
 
11,233

Total
 
$
24,412


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 March 31,
 
(Dollars in thousands)
 
2017
 
2016
 
Service cost
 
$
15

 
$
15

 
Interest cost
 
19

 
19

 
Prior service cost amortization
 
(19
)
 
(7
)
 
Net gain recognition
 
(16
)
 
(15
)
 
Net periodic benefit cost
 
$
(1
)
 
$
12

 

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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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 March 31, 2017
Service cost
 
$
10

Interest cost
 
75

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

Net gain recognition
 

Net periodic benefit cost
 
$
(50
)
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 March 31, 2017. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2013 through 2016 tax years are subject to examination as of March 31, 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 March 31, 2017 compared to $0.4 million for the same period in 2016.
The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the three months ended March 31, 2017 were $0.4 million, $0.4 million and $0.1 million, respectively. The carrying value of the investment in affordable housing credits is $15.0 million at March 31, 2017, compared to $15.4 million at December 31, 2016.
10. STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with FASB ASC 718, Stock Compensation. Compensation expense relating to all share-based payments is recognized on a straight-line basis over the applicable vesting period. Our Stock Incentive Plans provide for the granting of stock options, stock appreciation rights, performance awards, restricted stock and restricted stock unit awards, deferred stock units, and other awards that are payable in or valued by reference to our common shares. The number of shares reserved for issuance under our 2013 Incentive Plan (2013 Plan) is 2,096,535. At March 31, 2017, there were 490,926 shares available for future grants under the 2013 Plan.
We record stock-based compensation expense related to awards granted to Associates in Salaries, benefits and other compensation; expense related to awards granted to directors is recorded in Other operating expense in our Consolidated Statements of Income. Total stock-based compensation expense recognized during the three months ended March 31, 2017 and 2016 was $0.9 million ($0.6 million after tax) and $0.8 million ($0.4 million after tax), respectively.

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Stock Options
Stock options are granted with an exercise price not less than the fair market value of our common stock on the date of the grant. All stock options are to be granted at not less than the fair market value of our common stock on the date of the grant. All stock options granted during 2017 and 2016 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire seven years from the grant date. Generally, all awards become exercisable immediately in the event of a change in control, as defined within the Stock Incentive Plans. We issue new shares upon the exercise of options.
We determine the grant date fair value of stock options using the Black-Scholes option-pricing model. The model requires the use of numerous assumptions, many of which are subjective. The expected term was derived from historical exercise patterns and represents the amount of time that stock options granted are expected to be outstanding. Other significant assumptions to determine 2017 and 2016 grant date fair value included volatility measured using the fluctuation in month end closing stock prices over a period which corresponds with the average expected option life; a weighted-average risk-free rate of return (zero coupon treasury yield); and a dividend yield indicative of our current dividend rate
The following table summarizes the assumptions we used to value options issued during the three months ended March 31, 2017 and 2016:
 
 
March 31, 2017

 
March 31, 2016

Expected Term (in years)
 
5.3

 
5.3

Volatility
 
24.85
%
 
29.60
%
Weighted-average risk free interest rate
 
1.95
%
 
1.24
%
Dividend Yield
 
0.6
%
 
0.8
%
The following table summarizes our stock option activity for the three months ended March 31, 2017.
 
 
Three months ended March 31, 2017
 
 
Shares
 
Weighted- Average Exercise Price
Stock Options:
 
 
 
 
Outstanding at beginning of period
 
1,547,980

 
17.83

Granted
 
45,134

 
47.05

Exercised
 
(117,612
)
 
15.47

Forfeited
 
(750
)
 
15.83

Outstanding at end of period
 
1,474,752

 
18.91

Nonvested at end of period
 
424,459

 
23.64

Exercisable at end of period
 
1,050,293

 
17.00

Weighted-average fair value of options granted
 
$
11.50

 
 
The following table provides information about our nonvested stock options outstanding at March 31, 2017:
 
 
March 31, 2017
 
 
Shares
 
Weighted- Average Exercise Price
Stock Options:
 
 
 
 
Nonvested at beginning of period
 
$
704,421

 
$
19.08

Granted
 
45,134

 
47.05

Forfeited
 
(750
)
 
15.83

Vested during period
 
(324,346
)
 
17.01

Nonvested at end of period
 
$
424,459

 
23.64

The total amount of unrecognized compensation cost related to nonvested stock options as of March 31, 2017 was $5.5 million. The weighted-average period over which the expense is expected to be recognized is 1.86 years. During the first quarter of 2017, we recognized $0.5 million of compensation expense related to these awards.

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Restricted Stock Units
Restricted stock units (RSUs) are granted at no cost to the recipient and generally vest over a four year period. All outstanding awards granted to senior executives vest over no less than a four year period. The 2013 Plan allows for awards with vesting periods less than four years subject to Board approval. The fair value of RSUs is equal to the fair value of the Company’s common stock on the date of grant. We recognize the expense related to RSUs granted to Associates in Salaries, benefits and other compensation expense; expense related to awards granted to directors is recorded in Other operating expense in our Statements of Income on an accrual basis over the requisite service period for the entire award.
The Long-Term Performance-Based Restricted Stock Unit program (Long-Term Program) provided for awards up to an aggregate of 233,400 RSUs to participants, only after the achievement of targeted levels of return on assets (ROA) in any year through 2013. During 2013, the Company achieved the 1.00% ROA performance level. In accordance with the Long-Term Program, the Company issued 108,456 RSUs to the plan’s participants in 2014. The RSUs vest in 25% increments over four years and we recognize expense over the implicit service period associated with the performance condition. During the first quarter of 2017, we recognized $0.1 of compensation expense related to this program.
The following table summarizes the Company’s RSAs and RSUs, including performance awards, and changes during the three months ended March 31, 2017:
 
 
Three months ended March 31, 2017
 
 
Units
(in whole)
 
Weighted Average
Grant-Date Fair
Value per Unit
Outstanding at beginning of period
 
$
135,592

 
$
27.14

Granted
 
36,523

 
47.05

Vested
 
(33,803
)
 
20.22

Forfeited
 
(1,823
)
 
27.21

Outstanding at end of period
 
$
136,489

 
34.20

The total amount of compensation cost to be recognized relating to non-vested restricted stock, including performance awards, as of March 31, 2016, was $7.0 million. The weighted-average period over which the expense is expected to be recognized is 3.2 years. During the three months ended March 31, 2017, we recognized $0.2 million of compensation cost related to these awards.

11. 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.

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The following tables present financial instruments carried at fair value as of March 31, 2017 and December 31, 2016 by level in the valuation hierarchy (as described above):
 
 
March 31, 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
 
$

 
$
277,711

 
$

 
$
277,711

FNMA MBS
 

 
386,051

 

 
386,051

FHLMC MBS
 

 
64,171

 

 
64,171

GNMA MBS
 

 
27,597

 

 
27,597

GSE
 

 
32,981

 

 
32,981

Other investments
 
614

 

 

 
614

Other assets
 

 
1,108

 

 
1,108

Total assets measured at fair value on a recurring basis
 
$
614

 
$
789,619

 
$

 
$
790,233

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

 
$
3,194

 
$

 
$
3,194

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

 
$

 
$
3,582

 
$
3,582

Loans held for sale
 

 
29,394

 

 
29,394

Impaired loans, net
 

 

 
62,443

 
62,443

Total assets measured at fair value on a nonrecurring basis
 
$

 
$
29,394

 
$
66,025

 
$
95,419

 
 
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


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Table of Contents

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ending March 31, 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 March 31, 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 approximately $33.0 million in U.S. Treasury Notes and Federal Agency debentures, and $755.5 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.
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 secondary markets 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 $67.7 million and $51.6 million at March 31, 2017 and December 31, 2016, respectively. The valuation allowance on impaired loans was $5.3 million as of March 31, 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.

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Table of Contents

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.
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
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 evaluated the shares carried at cost for OTTI as of March 31, 2017, and the evaluation showed no OTTI as of March 31, 2017. Following resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares.
While only current owners of Class B shares are allowed to purchase other Class B shares, there have been several transactions between Class B shareholders. Based on these transactions we estimate the value of our Visa Class B shares to be $23.1 million as of March 31, 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.

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Other Liabilities
Other liabilities includes cash flow derivatives and derivative on the residential mortgage held for sale pipeline.
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.
The book value and estimated fair value of our financial instruments are as follows:
 
(Dollars in thousands)
 
Fair Value
 
March 31, 2017
 
December 31, 2016
 
 
Measurement
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
855,263

 
$
855,263

 
$
821,923

 
$
821,923

Investment securities available for sale
 
See previous table
 
789,125

 
789,125

 
794,543

 
794,543

Investment securities held to maturity
 
Level 2
 
163,611

 
163,241

 
164,346

 
163,232

Loans, held for sale
 
Level 2
 
29,394

 
29,394

 
54,782

 
54,782

Loans, net(1)(2)
 
Level 2, 3
 
4,489,708

 
4,450,924

 
4,397,876

 
4,300,963

Impaired loans, net
 
Level 3
 
62,443

 
62,443

 
46,499

 
46,499

Stock in FHLB of Pittsburgh
 
Level 2
 
20,002

 
20,002

 
38,248

 
38,248

Accrued interest receivable
 
Level 2
 
16,712

 
16,712

 
17,027

 
17,027

Other assets
 
Level 3
 
13,920

 
28,527

 
9,189

 
15,787

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
Level 2
 
5,376,830

 
5,040,211

 
4,738,438

 
4,423,921

Borrowed funds
 
Level 2
 
700,849

 
697,952

 
1,267,447

 
1,264,170

Standby letters of credit
 
Level 3
 
507

 
507

 
468

 
468

Accrued interest payable
 
Level 2
 
2,931

 
2,931

 
1,151

 
1,151

Other liabilities
 
Level 2
 
3,194

 
3,194

 
3,380

 
3,380

 (1) Excludes impaired loans, net.
 (2) Includes reverse mortgage loans, which are categorized as Level 3.
At March 31, 2017 and December 31, 2016 we had no commitments to extend credit measured at fair value.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. 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.

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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 March 31, 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
 
$
3,039

Total derivatives designated as hedging instruments
 
 
 
 
 
 
 
$
3,039


Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense 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 variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
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 three months ended March 31, 2017, such derivatives were used to hedge the variable cash flows associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017, we did not record any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that less than $0.1 million will be reclassified as an increase to interest expense.
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 March 31, 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 months ended March 31, 2017 and March 31, 2016 .
(Dollars in thousands)
 
Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion)
 
Location of (Loss) or Gain Reclassified from Accumulated OCI into Income (Effective Portion)
 
 
Three months ended March 31,
 
 
Derivatives in Cash Flow Hedging Relationships
 
2017
 
2016
 
 
Interest Rate Products
 
$
(3,039
)
 
$

 
Interest expense
Total
 
$
(3,039
)
 
$

 
 
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.

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As of March 31, 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 $3.0 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 March 31, 2017, we could have been required to settle our obligations under the agreements at the termination value.
13. 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 ordinary 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. 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 Capital Management, LLC is a registered investment advisor. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and current income. West Capital Management, a registered investment advisor, 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 Financial Solutions 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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Segment information for the three months ended March 31, 2017 and 2016 is as follows:
 
 
Three months ended March 31, 2017
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect®
 
Wealth
Management
 
Total
Statement of Income
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 
 
 
 
 
 
Interest income
 
$
58,688

 
$

 
$
2,138

 
$
60,826

Noninterest income
 
10,167

 
9,677

 
8,248

 
28,092

Total external customer revenues
 
68,855

 
9,677

 
10,386

 
88,918

Inter-segment revenues:
 
 
 
 
 
 
 
 
Interest income
 
1,996

 

 
2,065

 
4,061

Noninterest income
 
2,164

 
191

 
36

 
2,391

Total inter-segment revenues
 
4,160

 
191

 
2,101

 
6,452

Total revenue
 
73,015

 
9,868

 
12,487

 
95,370

External customer expenses:
 
 
 
 
 
 
 
 
Interest expense
 
7,463

 

 
260

 
7,723

Noninterest expenses
 
38,960

 
6,135

 
6,411

 
51,506

Provision for loan losses
 
1,716

 

 
446

 
2,162

Total external customer expenses
 
48,139

 
6,135

 
7,117

 
61,391

Inter-segment expenses:
 
 
 
 
 
 
 
 
Interest expense
 
2,065

 
1,405

 
591

 
4,061

Noninterest expenses
 
227

 
715

 
1,449

 
2,391

Total inter-segment expenses
 
2,292

 
2,120

 
2,040

 
6,452

Total expenses
 
50,431

 
8,255

 
9,157

 
67,843

Income before taxes
 
$
22,584

 
$
1,613

 
$
3,330

 
$
27,527

Income tax provision
 
 
 
 
 
 
 
8,590

Consolidated net income
 
 
 
 
 
 
 
18,937

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
2,088

 
$
22

 
$
254

 
$
2,364


 
 
March 31, 2017
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect®
 
Wealth
Management
 
Total
Statement of Financial Condition
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
99,812

 
$
751,201

 
$
4,250

 
$
855,263

Goodwill
 
145,761

 

 
20,199

 
165,960

Other segment assets
 
5,608,912

 
4,097

 
218,667

 
5,831,676

Total segment assets
 
$
5,854,485

 
$
755,298

 
$
243,116

 
$
6,852,899



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Three months ended March 31, 2016
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect®
 
Wealth
Management
 
Total
Statement of Income
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 

 
 
 
 
Interest income
 
$
48,038

 
$

 
$
2,008

 
$
50,046

Noninterest income
 
9,852

 
8,271

(r) 
5,545

 
23,668

Total external customer revenues
 
57,890

 
8,271

 
7,553

 
73,714

Inter-segment revenues:
 
 
 
 
 
 
 
 
Interest income
 
1,061

 

 
1,895

 
2,956

Noninterest income
 
2,060

 
193

 
24

 
2,277

Total inter-segment revenues
 
3,121

 
193

 
1,919

 
5,233

Total revenue
 
61,011

 
8,464

 
9,472

 
78,947

External customer expenses:
 
 
 
 
 
 
 
 
Interest expense
 
4,497

 

 
193

 
4,690

Noninterest expenses
 
33,812

 
5,448

(r) 
4,537

 
43,797

Provision for loan losses
 
815

 

 
(35
)
 
780

Total external customer expenses
 
39,124

 
5,448

 
4,695

 
49,267

Inter-segment expenses
 
 
 
 
 
 
 
 
Interest expense
 
1,895

 
555

 
506

 
2,956

Noninterest expenses
 
217

 
715

 
1,345

 
2,277

Total inter-segment expenses
 
2,112

 
1,270

 
1,851

 
5,233

Total expenses
 
41,236

 
6,718

 
6,546

 
54,500

Income before taxes
 
$
19,775

 
$
1,746

 
$
2,926

 
$
24,447

Income tax provision
 
 
 
 
 
 
 
8,677

Consolidated net income
 
 
 
 
 
 
 
15,770

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
1,211

 
$
20

 
$
2

 
$
1,233


 
 
December 31, 2016
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect®
 
Wealth
Management
 
Total
Statement of Financial Condition
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
100,893

 
$
717,643

 
$
3,387

 
$
821,923

Goodwill
 
147,396

 

 
20,143

 
167,539

Other segment assets
 
5,545,611

 
3,533

 
226,664

 
5,775,808

Total segment assets
 
$
5,793,900

 
$
721,176

 
$
250,194

 
$
6,765,270


(r) Noninterest income and Noninterest expense for the period ended March 31, 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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14. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales
Given the current interest rate environment, coupled with our desire not to hold newly originated residential mortgage loans in our portfolio, we generally sell these assets in the secondary market to mortgage loan aggregators and on a more limited basis, to 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 generally 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 three months ended March 31, 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 March 31, 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 $538.7 million at March 31, 2017 compared to $518.8 million at December 31, 2016. At March 31, 2017 maturities ranged from under one year to twenty years. The aggregate market value of these swaps to the customers was a liability of $10.0 million at March 31, 2017 and $10.9 million at December 31, 2016. We had no reserves for the swap guarantees as of March 31, 2017.
15. 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 stockholder's 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.

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

 
$
957

 
$
(1,772
)
 
$
(7,617
)
Other comprehensive income (loss) before reclassifications
 
1,272

 

 

 
(112
)
 
1,160

Less: Amounts reclassified from accumulated other comprehensive loss
 
(206
)
 
(101
)
 
(23
)
 

 
(330
)
Net current-period other comprehensive income (loss)
 
1,066

 
(101
)
 
(23
)
 
(112
)
 
830

Balance, March 31, 2017
 
$
(7,128
)
 
$
1,291

 
$
934

 
$
(1,884
)
 
$
(6,787
)
Balance, December 31, 2015
 
$
(1,887
)
 
$
1,795

 
$
788

 
$

 
$
696

Other comprehensive income before reclassifications
 
10,572

 

 

 

 
10,572

Less: Amounts reclassified from accumulated other comprehensive income
 
(189
)
 
(103
)
 
478

 

 
186

Net current-period other comprehensive income (loss)
 
10,383

 
(103
)
 
478

 

 
10,758

Balance, March 31, 2016
 
$
8,496

 
$
1,692

 
$
1,266

 
$

 
$
11,454

The Consolidated Statements of Income were impacted by components of other comprehensive income (loss) as shown in the table below:
 
 
 
 
 
 
 
Affected line item in
 
 
Three Months Ended
 
 Consolidated
(Dollars in thousands)
 
March 31,
 
Statements of Income
 
 
2017
 
2016
 
 
Securities available for sale:
 
 
 
 
 
 
Realized gains on securities transactions
 
$
(320
)
 
$
(305
)
 
Security gains, net
Income taxes
 
114

 
116

 
Income tax provision
Net of tax
 
$
(206
)
 
$
(189
)
 
 
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
 
$
(160
)
 
$
(168
)
 
Interest income on investment securities
Income taxes
 
59

 
65

 
Income tax provision
Net of tax
 
$
(101
)
 
$
(103
)
 
 
Amortization of Defined Benefit Pension items:
 
 
 
 
 
 
Prior service (credits) costs
 
$
(19
)
 
$
(7
)
 
 
Actuarial (gains) losses
 
(16
)
 
791

 
 
Total before tax
 
$
(35
)
 
$
784

 
Salaries, benefits and other compensation
Income taxes
 
12

 
(306
)
 
Income tax provision
Net of tax
 
(23
)
 
478

 
 
Total reclassifications
 
$
(330
)
 
$
186

 
 


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16. 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 March 31, 2017 and December 31, 2016 were $1.6 million and $1.3 million, respectively. Total deposits from related parties at March 31, 2017 and December 31, 2016 were $6.3 million and $3.6 million, respectively. During the first quarter of 2017, new loans and credit line advances to related parties totaled $0.4 million and repayments were less than $0.1 million.

17. 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.
From time to time we are brought into certain legal matters and/or disputes through our Wealth Management segment, as a result of sometimes highly complex documents and servicing requirements that are part of this business. While the outcomes carry some degree of uncertainty, management does not currently anticipate that the ultimate liability, if any, arising out of such other proceedings we are aware of, will have a material effect on the Consolidated Financial Statements.

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 Corp’s acquisition of Christiana Trust. According to the allegations contained in the Claim, certain death benefits made payable to the asserted trustee of the Trust were misappropriated by individuals associated with that trustee and plan sponsor. None of those individuals, however, were employed by or agents of Christiana Trust or WSFS Bank. It also is alleged that Christiana Trust breached its fiduciary duty and engaged in fraud, negligence and statutory theft in connection with the disappearance of the misappropriated 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 asserted trustee of the Trust. The Claim subsequently was amended to add a count for breach of contract. The Claim seeks an award of approximately $30 million plus interest, as well as the costs incurred by Universitas in pursuing the Claim and statutory and other penalties. WSFS is vigorously defending itself against the Claim and believes that it has valid factual and legal defenses to the Claim. 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
The Company is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by the Company’s subsidiary, Wilmington Savings Fund Society, FSB, or WSFS Bank, one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). At $6.85 billion in assets and $17.57 billion in assets under management and 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, the Bank has been in operation for more than 185 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remains 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.
The Company has four consolidated subsidiaries, WSFS Bank, Cypress Capital Management, LLC (Cypress), WSFS Capital Management, LLC (West Capital) and WSFS Wealth Management, LLC (Powdermill) as well as one unconsolidated subsidiary, WSFS Capital Trust III (the Capital Trust). WSFS Bank has three wholly-owned subsidiaries, WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC (Monarch).
Our core banking business is commercial lending funded by customer-generated deposits. We have built a $3.85 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 March 31, 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 those branches and through 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 and smart safe and cash logistics in the U.S. It manages over $1.02 billion in total cash and services in over 21,000 non-bank ATMs nationwide and over 970 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 $169.8 million in assets under management (AUM), provides insurance and brokerage products primarily to our retail banking clients in assets under management. Cypress is a registered investment adviser with approximately $774.3 million in assets under management. Cypress 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 is a registered investment adviser with approximately $779.5 million in assets under management. West Capital 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 $15.85 billion in assets under management and administration, 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 Financial Solutions, LLC is a multi-family office that specializes in providing unique, independent solutions to high net worth individuals, families and corporate executives. 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 $87.6 million, or 1%, to $6.85 billion during the three months ended March 31, 2017. Net loans increased $107.8 million, or 2%, primarily due to organic growth in our loan portfolio. Cash and cash equivalents increased $33.3 million, or 4%, primarily due to higher cash in non-owned ATMs reflecting the continued growth of our Cash Connect® segment. Partially offsetting these increases, loans held for sale decreased $25.4 million, or 46% consistent with our strategy to sell most newly originated residential mortgages in the secondary market. Stock in the Federal Home Loan Bank of Pittsburgh (FHLB) decreased $18.2 million, or 48%, due to a large short-term deposit from a trust relationship that resulted in a reduction in FHLB advances at March 31, 2017.
Total liabilities increased $71.0 million, or 1.2%, to $6.15 billion during the three months ended March 31, 2017. Deposits increased $638.4 million, or 13%, due to the aforementioned short-term trust deposit of $352.4 million that was received late in the first quarter of 2017, as well as strong organic growth. FHLB advances, used to fund growth in our balance sheet assets, decreased $556.1 million, or 65%, due to the increase in deposits.
Capital Resources
Senior Debt:
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 on June 15, 2026. The Company is using the net proceeds from the offering for general corporate purposes.
In 2012, we issued and sold $55.0 million in aggregate principal amount of 6.25% senior notes due 2019 (the “2012 senior debt”). The 2012 senior debt is unsecured and ranks equally with all of our other present and future unsecured unsubordinated obligations. The 2012 senior debt is effectively subordinated to our secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries. At our option, the 2012 senior debt is callable, in whole or in part, on September 1, 2017, or on any scheduled interest payment date thereafter, at a price equal to the outstanding principal amount to be redeemed plus accrued and unpaid interest. The 2012 senior debt matures on September 1, 2019.
In the first quarter of 2017, WSFS repurchased 62,000 shares of common stock at an average price of $45.41 as part of our 5% buyback program approved by the Board of Directors during the fourth quarter of 2015. WSFS has 892,194 shares, or nearly 3% of outstanding shares, remaining to repurchase under this authorization.
Stockholders’ equity increased $16.7 million between December 31, 2016 and March 31, 2017. This increase was primarily due to net income for the three months ended March 31, 2017 of $18.9 million, partially offset by the payment of common stock dividends and stock buybacks during the quarter.

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Below is a table comparing the Bank and the Company’s consolidated capital position to the minimum regulatory requirements as of March 31, 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
 
$
679,256

 
11.97
%
 
$
454,012

 
8.00
%
 
$
567,516

 
10.00
%
WSFS Financial Corporation
 
637,344

 
11.21
%
 
455,025

 
8.00
%
 
568,781

 
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
638,377

 
11.25
%
 
340,509

 
6.00
%
 
454,012

 
8.00
%
WSFS Financial Corporation
 
596,465

 
10.49
%
 
341,269

 
6.00
%
 
455,025

 
8.00
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
638,377

 
11.25
%
 
255,382

 
4.50
%
 
368,885

 
6.50
%
WSFS Financial Corporation
 
531,528

 
9.35
%
 
255,952

 
4.50
%
 
369,708

 
6.50
%
Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
638,377

 
9.60
%
 
265,948

 
4.00
%
 
332,436

 
5.00
%
WSFS Financial Corporation
 
596,465

 
8.94
%
 
266,836

 
4.00
%
 
333,544

 
5.00
%
Book value per share of common stock was $22.38 at March 31, 2017, an increase of $0.48, or 2% from $21.90 at December 31, 2016. Tangible common book value per share of common stock (a non-GAAP financial measure) was $16.33 at March 31, 2017, an increase of $0.53, or 3%, from $15.80 at December 31, 2016. 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.
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 $97.1 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 March 31, 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.
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 net income, 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 and government sponsored enterprises notes, 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 maintain required and prudent levels of liquidity.

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During the three months ended March 31, 2017, cash and cash equivalents increased $33.3 million to $855.3 million from $821.9 million as of December 31, 2016. Cash provided by operating activities was $48.2 million, reflecting the cash impact from earnings and sale of loans held for sale during the three months ended March 31, 2017. Cash used by investing activities was $82.6 million, primarily due to increased lending of $106.9 million, partially offset by net cash received from redemption of FHLB stock of $18.2 million. Cash provided by financing activities was $67.7 million, primarily from increases in cash of $623.2 million from net increases in deposit balances, offset by net cash repayment of $556.1 million in FHLB advances.

NONPERFORMING ASSETS
Nonperforming assets (NPAs) include nonaccruing loans, nonperforming real estate, other real estate owned and restructured commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.
The following table shows our nonperforming assets and past due loans at the dates indicated:
 
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Nonaccruing loans:
 
 
 
 
Commercial
 
$
16,520

 
$
2,015

Owner-occupied commercial
 
4,020

 
2,078

Consumer
 
4,486

 
3,995

Commercial mortgages
 
9,695

 
9,821

Residential mortgages
 
4,957

 
4,967

Construction
 

 

Total nonaccruing loans
 
39,678

 
22,876

Other real estate owned
 
3,582

 
3,591

Restructured loans (1)
 
17,260

 
14,336

Total nonperforming assets
 
$
60,520

 
$
40,803

Past due loans: (1)
 
 
 
 
Residential mortgages
 
$
850

 
$
153

Consumer
 
106

 
285

Commercial and commercial mortgages
 
809

 

Total past due loans
 
$
1,765

 
$
438

Ratio of allowance for loan losses to total gross loans (2)
 
0.87
%
 
0.89
%
Ratio of nonaccruing loans to total gross loans (2)
 
0.87

 
0.51

Ratio of nonperforming assets to total assets
 
0.88

 
0.60

Ratio of loan loss allowance to nonaccruing loans
 
100.37

 
173.77

Ratio of loan loss allowance to total nonperforming assets
 
0.66

 
0.97

(1) 
Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing TDRs are included in their respective categories of nonaccruing loans.
(2) 
Total loans exclude loans held for sale and reverse mortgages.

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Nonperforming assets increased $19.7 million between December 31, 2016 and March 31, 2017. The increase was primarily due to one $9.7 million locally-based, C&I participation that was downgraded during the quarter after a targeted energy sector review at the agent bank. The loan relationship is current and resolution is expected in the near term with no impact to net chargeoffs. The remaining increase in nonperforming assets was primarily due to three smaller C&I relationships (ranging from $1.7 to $3.5 million) that were moved to nonaccruing status during the quarter. These relationships were from unrelated industries that had specific events that caused weakness in the underlying business. In each case, a comprehensive impairment analysis was completed and the results were included in the provision for loan losses for the three months ended March 31, 2017.
The ratio of nonperforming assets to total assets increased to 0.88% at March 31, 2017 from 0.60% at December 31, 2016. TDRs (accruing) increased during the three months ended March 31, 2017 by $2.9 million mainly due to the addition of one construction portfolio relationship of $1.7 million. Other Real Estate Owned (OREO) properties declined slightly due to the sale of seven properties totaling $1.7 million and offset by one new property at $1.6 million.
The following table summarizes the changes in nonperforming assets during the periods indicated:
 
 
 
Three months ended
 
Three months ended
(Dollars in thousands)
 
March 31, 2017
 
March 31, 2016
Beginning balance
 
$
40,803

 
$
39,892

Additions
 
25,849

 
2,473

Collections
 
(2,824
)
 
(3,940
)
Transfers to accrual
 
(891
)
 

Charge-offs, net
 
(2,417
)
 
(746
)
Ending balance
 
$
60,520

 
$
37,679

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.

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 March 31, 2017, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $78.9 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 91.3% at December 31, 2016 to 102.6% at March 31, 2017. Likewise, the one-year interest-sensitive gap as a percentage of total assets increased to 1.15% at March 31, 2017 from (4.41%) at December 31, 2016. 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.

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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 March 31, 2017 and December 31, 2016:
 
March 31, 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
 
9%
 
14.84%
 
3%
 
14.04%
+200
 
6%
 
14.88%
 
2%
 
14.09%
+100
 
3%
 
14.78%
 
<1%
 
14.00%
 
—%
 
14.56%
 
—%
 
13.80%
-100
 
(3)%
 
13.84%
 
<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 at that time.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.

RESULTS OF OPERATIONS
We recorded net income of $18.9 million, or $0.59 per diluted common share, for the three months ended March 31, 2017, a $3.2 million, or 20% increase from $15.8 million, or $0.52 per share, for the three months ended March 31, 2016. Net interest income for the three months ended March 31, 2017 was $53.1 million, an increase of $7.7 million compared to the three months ended March 31, 2016, reflecting continued strong organic and acquisition-related growth in our loan portfolio, partially offset by higher interest expense related to deposit growth, FHLB advances and our issuance of senior unsecured notes in the second quarter of 2016. Noninterest income increased $4.4 million, 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 $7.7 million increase in noninterest expenses, primarily reflecting our higher employee-related and ongoing operating costs to support our significant organic and acquisition growth - see “Noninterest Expense” for further information.
Our noninterest expenses are driven by our high-touch, high-service model. This combined with our significant and diverse fee income mix results in a first quarter 2017 efficiency ratio of 62.9% compared to 62.8% for the first quarter of 2016. Typically our first quarter efficiency ratio is impacted by both seasonal increases in our operating costs and a seasonal decrease in our fee income mix. Operating costs are primarily higher in the first quarter due to the seasonality associated with compensation and related costs, specifically related to taxes, 401(k) matching costs, incentive payments, annual merit increases and the reset of tax caps. Our fee income mix was primarily lower due to the typical first-quarter seasonality associated with our wealth management, Cash Connect® and mortgage banking businesses, in addition to the lower day count and impact across all segments.
Management believes its operating costs are at an appropriate level and scale for the Company’s size and products and services as our fee -based businesses typically carry a higher efficiency ratio as they derive revenue based on human capital versus assets. Management continues to optimize and review its operations in order to limit increases or reduce costs over the remainder of the year. Consistent with previous years, the Company expects gradual improvement of its efficiency ratio throughout the year, from the first quarter result of 62.9% trending towards a fourth quarter ratio in the high 50%s, and ultimately expects to achieve its goal of a relatively flat efficiency ratio for the full year 2017 as compared to full year 2016. The relatively flat efficiency ratio and core operating leverage year-over-year is due to continued reinvestment in our balance sheet and capabilities to support our organic and acquisition 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 March 31,
 
 
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
 
$
1,392,925

 
$
17,023

 
4.96
%
 
$
1,192,711

 
$
14,280

 
4.82
%
Residential real estate loans
 
281,953

 
4,981

 
7.07

 
281,501

 
3,909

 
5.55

Commercial loans
 
2,391,817

 
26,897

 
4.59

 
1,968,278

 
21,965

 
4.53

Consumer loans
 
457,373

 
5,408

 
4.80

 
361,040

 
4,093

 
4.56

Loans held for sale
 
41,092

 
372

 
3.62

 
32,891

 
315

 
3.83

Total loans
 
4,565,160

 
54,681

 
4.87

 
3,836,421

 
44,562

 
4.69

Mortgage-backed securities (3)
 
759,159

 
4,395

 
2.32

 
711,352

 
3,894

 
2.19

Investment securities (3)
 
228,841

 
1,249

 
3.17

 
203,665

 
1,220

 
3.54

Other interest-earning assets
 
42,910

 
501

 
4.67

 
30,558

 
370

 
4.87

Total interest-earning assets
 
5,596,070

 
60,826

 
4.46

 
4,781,996

 
50,046

 
4.27
%
Allowance for loan losses
 
(40,556
)
 
 
 
 
 
(37,544
)
 
 
 
 
Cash and due from banks
 
145,712

 
 
 
 
 
93,998

 
 
 
 
Cash in non-owned ATMs
 
683,138

 
 
 
 
 
452,052

 
 
 
 
Bank-owned life insurance
 
101,522

 
 
 
 
 
90,290

 
 
 
 
Other noninterest-earning assets
 
348,582

 
 
 
 
 
215,201

 
 
 
 
Total assets
 
$
6,834,468

 
 
 
 
 
$
5,595,993

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
919,456

 
$
385

 
0.17
%
 
$
766,209

 
$
245

 
0.13
%
Money market
 
1,323,969

 
1,026

 
0.31

 
1,098,595

 
749

 
0.27

Savings
 
574,252

 
213

 
0.15

 
443,822

 
139

 
0.13

Customer time deposits
 
581,547

 
1,090

 
0.76

 
574,422

 
745

 
0.52

Total interest-bearing customer deposits
 
3,399,224

 
2,714

 
0.32

 
2,883,048

 
1,878

 
0.26

Brokered certificates of deposit
 
175,789

 
361

 
0.83

 
166,974

 
241

 
0.58

Total interest-bearing deposits
 
3,575,013

 
3,075

 
0.35

 
3,050,022

 
2,119

 
0.28

FHLB of Pittsburgh advances
 
866,780

 
1,858

 
0.87

 
674,247

 
1,048

 
0.63

Trust preferred borrowings
 
67,011

 
446

 
2.70

 
67,011

 
371

 
2.23

Senior debt
 
152,103

 
2,121

 
5.58

 
53,741

 
942

 
7.01

Other borrowed funds (4)
 
142,292

 
223

 
0.64

 
155,011

 
210

 
0.54

Total interest-bearing liabilities
 
4,803,199

 
7,723

 
0.65
%
 
4,000,032

 
4,690

 
0.47
%
Noninterest-bearing demand deposits
 
1,255,950

 
 
 
 
 
949,607

 
 
 
 
Other noninterest-bearing liabilities
 
76,845

 
 
 
 
 
54,307

 
 
 
 
Stockholders’ equity
 
698,474

 
 
 
 
 
592,047

 
 
 
 
Total liabilities and stockholders’ equity
 
$
6,834,468

 
 
 
 
 
$
5,595,993

 
 
 
 
Excess of interest-earning assets over interest-bearing liabilities
 
$
792,871

 
 
 
 
 
$
781,964

 
 
 
 
Net interest and dividend income
 
 
 
$
53,103

 
 
 
 
 
$
45,356

 
 
Interest rate spread
 
 
 
 
 
3.81
%
 
 
 
 
 
3.80
%
Net interest margin
 
 
 
 
 
3.90
%
 
 
 
 
 
3.87
%
(1) 
Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2) 
Average balances include nonperforming loans and net of unearned income.
(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 March 31, 2017, net interest income increased $7.7 million, or 17% from the three months ended March 31, 2016, and the net interest margin was 3.90%, a 3 basis point increase compared to 3.87% for the first quarter of 2016. These year-over-year increases in margin dollars and percentages reflect the positive impact of our combination with Penn Liberty, offset somewhat by higher funding costs to support the increase in Cash Connect's® fee-based bailment business.
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 March 31, 2017 and 2016, we recorded a provision for loan losses of $2.2 million and $0.8 million, respectively.
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. The allowance for loan losses was $39.8 million at both March 31, 2017 and December 31, 2016. The allowance for loan losses and provision reflect the following; total net loans increased $107.8 million at March 31, 2017 when compared to December 31, 2016, loan downgrades and the addition of reserves were offset by payoff activity and improvement in qualitative adjustment factors due to continued improvement of economic conditions. The ratio of allowance for loan losses to total gross loans was 0.87% at March 31, 2017 and 0.89% at December 31, 2016. This ratio excluding the impact of all purchased loans would have been 1.04% at March 31, 2017
The table below represents a summary of changes in the allowance for loan losses for the three months ended March 31, 2017 and 2016, respectively.
 
 
 
Three months ended March 31,
(Dollars in thousands)
 
2017
 
2016
Beginning balance
 
$
39,751

 
$
37,089

Provision for loan losses
 
2,162

 
780

Charge-offs:
 
 
 
 
Commercial
 
1,255

 
179

Owner-occupied commercial
 
192

 

Commercial real estate
 
104

 
17

Construction
 
14

 
26

Residential real estate
 
11

 
14

Consumer
 
926

 
488

Overdrafts
 
217

 
143

Total charge-offs
 
2,719

 
867

Recoveries:
 
 
 
 
Commercial
 
84

 
110

Owner-occupied commercial
 
75

 
38

Commercial real estate
 
46

 
79

Construction
 
2

 
46

Residential real estate
 
120

 
22

Consumer
 
232

 
172

Overdrafts
 
73

 
87

Total recoveries
 
632

 
554

Net charge-offs
 
2,087

 
313

Ending balance
 
$
39,826

 
$
37,556

Net charge-offs to average gross loans outstanding, net of unearned income (1)
 
0.19
%
 
0.03
%
(1) Ratios for the three months ended March 31, 2017 and 2016 are annualized
 
 
 
 

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Noninterest (Fee) Income
During the first quarter of 2017, the Company earned fee income of $28.1 million, an increase of $4.4 million, or 19% , compared to $23.7 million in the first quarter of 2016. This increase is primarily due to an increase of $2.8 million in investment management and fiduciary income due to growth in several business lines and an increase of $1.2 million in credit/debit card and ATM income reflecting growth due to expanded revenue sources representing strong growth in our Wealth Management and Cash Connect® businesses.
Noninterest Expense
Noninterest expense for the first quarter of 2017 was $51.5 million, an increase of $7.7 million, or 18%, from $43.8 million in the first quarter of 2016. Contributing to the year-over-year increase was $4.8 million of ongoing operating costs from our combinations with Penn Liberty, Powdermill and West Capital. The remaining increase reflects higher compensation and related costs due to added staff and infrastructure costs 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 $8.6 million during the three months ended March 31, 2017, respectively, compared to an income tax expense of $8.7 million for the same period in 2016.
Our effective tax rate was 31.2% for the three months ended March 31, 2017 compared to 35.5% during the same period in 2016. The effective tax rate in 1Q 2017 decreased due to the tax benefit related to stock-based compensation activity during the quarter 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 three months ended March 31, 2017, due to greater transaction volume and increases in the Company’s stock price. The tax benefit recognized during the three months ended March 31, 2017 was $1.3 million, whereas no benefit was recognized in first quarter of 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 March 31, 2017 did not significantly change from our contractual obligations at December 31, 2016 , which are disclosed in our 2016 Annual Report on Form 10-K, except for data processing obligations, the impact of which is shown in the table below.
(Dollars in thousands)
Total at March 31, 2017
 
Remainder of 2017
 
2018-2019
 
2020-2021
 
2022 and Beyond
Data processing obligations
$
15,437

 
$
5,226

 
$
8,082

 
$
1,801

 
$
328


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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 is important to management and investors to 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)
 
March 31, 2017
 
December 31, 2016
Stockholders’ equity
 
$
704,001

 
$
687,336

Goodwill and other intangible assets
 
190,372

 
191,247

Tangible common equity (numerator)
 
$
513,629

 
$
496,089

Shares of common stock outstanding (denominator)
 
31,458

 
31,390

Book value per share of common stock
 
$
22.38

 
$
21.90

Goodwill and other intangible assets
 
6.05

 
6.10

Tangible book value per share of common stock
 
$
16.33

 
$
15.80


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 FHFA, an independent agency in the executive branch of the U.S. government, the 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.

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Basel III
In 2013, the Federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision (BCBS) 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 8.0%, 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 2.5% 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 March 31, 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 March 31, 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.


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 Exchange Act), 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b)
Changes in internal control over financial reporting. During the quarter ended March 31, 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 17 – 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 SEC.
 

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 March 31, 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)
January
 
20,000

 
$
45.67

 
20,000

 
934,194

February
 
22,000

 
45.16

 
22,000

 
912,194

March
 
20,000

 
45.42

 
20,000

 
892,194

Total
 
62,000

 
$
45.41

 
62,000

 
 
(1) 
During the fourth quarter of 2015, the Board of Directors 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
Not applicable
 

Item 4.    Mine Safety Disclosures
Not applicable
 

Item 5.    Other Information
Not applicable
Item 6. Exhibits
 
(a)
Exhibit 31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(b)
Exhibit 31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(c)
Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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: May 9, 2017
 
/s/ Mark A. Turner
 
 
Mark A. Turner
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: May 9, 2017
 
/s/ Dominic C. Canuso
 
 
Dominic C. Canuso
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

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