WSFS Financial Corporation
WSFS FINANCIAL CORP (Form: 10-Q, Received: 05/06/2016 17:49:39)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

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)   (Zip Code)

(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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 29, 2016.

 

Common Stock, par value $.01 per share

 

29,536,577

(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

     Page  
PART I. Financial Information   

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

     3   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

     4   
 

Consolidated Statements of Condition as of March 31, 2016 and December 31, 2015

     5   
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

     6   
 

Notes to the Consolidated Financial Statements for the Three Months Ended March 31, 2016 and 2015

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4.

 

Controls and Procedures

     51   
PART II. Other Information      51   

Item 1.

 

Legal Proceedings

     51   

Item 1A.

 

Risk Factors

     51   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     52   

Item 3.

 

Defaults upon Senior Securities

     52   

Item 4.

 

Mine Safety Disclosure

     52   

Item 5.

 

Other Information

     52   

Item 6.

 

Exhibits

     52   

Signatures

       53   

Exhibit 31.1

 

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 31.2

 

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 32

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

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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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended March 31,  
     2016      2015  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

     

Interest and fees on loans

   $ 43,517      $ 36,244  

Interest on mortgage-backed securities

     3,894        3,433  

Interest and dividends on investment securities:

     

Taxable

     77        61  

Tax-exempt

     1,143        799  

Interest on reverse mortgage loans

     1,045        1,236  

Other interest income

     370        1,078  
  

 

 

    

 

 

 
     50,046        42,851  
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits

     2,118        1,942  

Interest on Federal Home Loan Bank advances

     1,048        713  

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

     182        80  

Interest on trust preferred borrowings

     371        327  

Interest on senior debt

     942        942  

Interest on other borrowings

     29        30  
  

 

 

    

 

 

 
     4,690        4,034  
  

 

 

    

 

 

 

Net interest income

     45,356        38,817  

Provision for loan losses

     780        786  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     44,576        38,031  
  

 

 

    

 

 

 

Noninterest income:

     

Credit/debit card and ATM income

     6,901        6,027  

Deposit service charges

     4,276        3,905  

Wealth management income

     5,254        5,093  

Mortgage banking activities, net

     1,654        1,703  

Securities gains, net

     305        451  

Loan fee income

     477        463  

Bank owned life insurance income

     231        203  

Other income

     3,972        3,250  
  

 

 

    

 

 

 
     23,070        21,095  
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries, benefits and other compensation

     22,876        21,010  

Occupancy expense

     4,270        3,878  

Equipment expense

     2,473        2,082  

Data processing and operations expenses

     1,542        1,422  

Professional fees

     2,403        1,472  

FDIC expenses

     838        669  

Loan workout and OREO expenses

     503        (1

Marketing expense

     664        584  

Corporate development expense

     569        596  

Other operating expense

     7,061        7,201  
  

 

 

    

 

 

 
     43,199        38,913  
  

 

 

    

 

 

 

Income before taxes

     24,447        20,213  

Income tax provision

     8,677        7,324  
  

 

 

    

 

 

 

Net income

   $ 15,770      $ 12,889  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.53      $ 0.46  

Diluted

   $ 0.52      $ 0.45  

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  
   31-Mar  
     2016     2015  
     (Unaudited)  
     (In Thousands)  

Net Income

   $ 15,770     $ 12,889  

Other comprehensive income:

    

Net change in unrealized gains (losses) on investment securities available-for-sale

    

Net unrealized gains arising during the period, net of tax expense of $6,479 and $2,794, respectively

     10,572       4,567  

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $116 and $171, respectively

     (189     (280
  

 

 

   

 

 

 
     10,383       4,287  

Net change in securities held-to-maturity

    

Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax (benefit) of $65 and $0, respectively

     (103     (171

Net change in unfunded pension liability

    

Change in unfunded pension liability related to unrealized gain (loss), prior service cost and transition obligation, net of tax expense (benefit) of $306 and ($9), respectively

     478       (15
  

 

 

   

 

 

 

Total other comprehensive income

     10,758       4,101  
  

 

 

   

 

 

 

Total comprehensive income

   $ 26,528     $ 16,990  
  

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     March 31,
2016
    December 31,
2015
 
(In Thousands, Except Per Share Data)    (Unaudited)  

Assets:

    

Cash and due from banks

   $ 92,543     $ 83,065  

Cash in non-owned ATMs

     497,322       477,924  

Interest-bearing deposits in other banks

     163       190  
  

 

 

   

 

 

 

Total cash and cash equivalents

     590,028       561,179  

Investment securities, available-for-sale

     774,712       721,029  

Investment securities, held-to-maturity at cost

     166,962       165,862  

Loans held-for-sale at fair value

     36,178       41,807  

Loans, net of allowance for loan losses of 37,556 at March 31, 2016 and $37,089 at December 31, 2015

     3,757,729       3,729,050  

Reverse mortgage loans

     24,739       24,284  

Bank-owned life insurance

     90,439       90,208  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     30,711       30,519  

Assets acquired through foreclosure

     3,979       5,080  

Accrued interest receivable

     13,992       14,040  

Premises and equipment

     38,992       39,569  

Goodwill

     84,854       85,212  

Intangible assets

     9,718       10,083  

Other assets

     61,961       66,715  
  

 

 

   

 

 

 

Total assets

   $ 5,684,994     $ 5,584,637  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 964,487     $ 958,238  

Interest-bearing demand

     786,780       784,619  

Money market

     1,107,421       1,090,050  

Savings

     449,061       439,918  

Time

     322,260       333,000  

Jumbo certificates of deposit – customer

     238,679       254,011  
  

 

 

   

 

 

 

Total customer deposits

     3,868,688       3,859,836  

Brokered deposits

     200,083       156,730  
  

 

 

   

 

 

 

Total deposits

     4,068,771       4,016,566  

Federal funds purchased and securities sold under agreements to repurchase

     127,525       128,200  

Federal Home Loan Bank advances

     707,826       669,514  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     53,840       53,675  

Other borrowed funds

     15,062       14,486  

Accrued interest payable

     1,340       801  

Other liabilities

     46,039       53,913  
  

 

 

   

 

 

 

Total liabilities

     5,087,414       5,004,166  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,006,743 at March 31, 2016 and 55,945,245 at December 31, 2015

     561       560  

Capital in excess of par value

     257,793       256,435  

Accumulated other comprehensive income

     11,454       696  

Retained earnings

     584,617       570,630  

Treasury stock at cost, 26,484,272 shares at March 31, 2016 and 26,182,401 shares at December 31, 2015

     (256,845     (247,850
  

 

 

   

 

 

 

Total stockholders’ equity

     597,580       580,471  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,684,994     $ 5,584,637  
  

 

 

   

 

 

 

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,
 
     2016     2015  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 15,770     $ 12,889  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     780       786  

Depreciation of premises and equipment, net

     1,903       1,519  

Amortization of fees and discounts, net

     3,895       3,068  

Amortization of intangible assets

     549       466  

Decrease (increase) in accrued interest receivable

     48       (222

(Increase) decrease in other assets

     (3,534 )     (4,275

Origination of loans held-for-sale

     (72,474     (83,411

Proceeds from sales of loans held-for-sale

     77,834       66,225  

Gain on mortgage banking activities, net

     (1,654     (1,703

Gain on sale of securities, net

     (305     (451

Stock-based compensation expense

     758       1,364  

Excess tax benefit from stock-based compensation

     (419     (522

Increase in accrued interest payable

     539       617  

(Decrease) increase in other liabilities

     (7,930     (3,834

Loss (gain) on sale of other real estate owned and valuation adjustments, net

     76       75  

Deferred income tax expense

     3,293        2,389  

Increase in value of bank-owned life insurance

     (231     (203

Increase in capitalized interest, net, on reverse mortgage loans

     (1,193     (1,236
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

   $ 17,705     $ (6,459
  

 

 

   

 

 

 

Investing activities:

    

Purchases of investment securities held-to-maturity

     (3,329     —    

Repayments of investment securities held-to-maturity

     1,335       —    

Maturities and calls of investment securities held-to-maturity

     400       —    

Sale of investment securities available-for-sale

     38,932       35,553  

Purchases of investment securities available-for-sale

     (91,963     (94,300

Repayments of investment securities available-for-sale

     15,463       19,399  

Maturities of investment securities available for sale

     —         1,761  

Repayments on reverse mortgages

     1,582       3,743  

Disbursements for reverse mortgages

     (844     (244

Net increase in loans

     (30,748     (36,108

Net (increase) decrease in stock of FHLB

     (192     (4,377

Sales of assets acquired through foreclosure, net

     1,442       1,184  

Investment in premises and equipment, net

     (1,234     (817
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (69,156   $ (74,206
  

 

 

   

 

 

 

Financing activities:

    

Net increase in demand and saving deposits

     35,907        (103,384

(Decrease) increase in time deposits

     (26,072     (26,970

Increase in brokered deposits

     43,353        6,668  

(Decrease) increase in loan payable

     (407     21  

Receipts from FHLB advances

     28,349,212       14,439,318  

Repayments of FHLB advances

     (28,310,900     (14,221,453

Receipts from federal funds purchased and securities sold under agreement to repurchase

     8,710,770       6,981,250  

Repayments of federal funds purchased and securities sold under agreement to repurchase

     (8,711,445     (6,995,625

Dividends paid

     (1,783     (1,405

Issuance of common stock and exercise of common stock options

     241       498  

Purchase of treasury stock

     (8,995     (879

Excess tax benefit from stock-based compensation

     419       522  
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 80,300     $ 78,561  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     28,849       (2,104

Cash and cash equivalents at beginning of period

     561,179       508,039  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 590,028     $ 505,935  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 4,151     $ 3,417  

Cash paid for income taxes, net

     9,554       8,566  

Loans transferred to other real estate owned

     417       1,613  

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

     1,510        211  

Net change in accumulated other comprehensive income

     10,758       4,101  

Non-cash goodwill adjustments, net

     (358     173  

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 ENDED MARCH 31, 2016

(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) and Cypress Capital Management, LLC (Cypress). We also have one unconsolidated affiliate, WSFS Capital Trust III (the Trust). WSFS Bank has three wholly-owned subsidiaries, WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC (Monarch).

The acronyms and abbreviations below are used in the unaudited Notes to Consolidated Financial Statements as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.

 

AICPA: American Institute of Certified Public Accountants    FASB: Financial Accounting Standards Board
Allowance: Allowance for loan losses or ALLL    FDIC: Federal Deposit Insurance Corporation
Alliance: Alliance Bancorp Inc. of Pennsylvania    Federal Reserve: Board of Governors of the Federal Reserve System
Array: Array Financial Group    Monarch: Monarch Entity Services, LLC
Arrow: Arrow Land Transfer    FHLB: Federal Home Loan Bank
ASC: Accounting standard codification    FHLMC: Federal Home Loan Mortgage Corporation
Associate: Employee    GAAP: U.S. Generally Accepted Accounting Principles
ASU: Accounting standard update    GNMA: Government National Mortgage Association
BCBS: Basel Committee on Banking Supervision    GSE: U.S. Government and government sponsored enterprises
C&I: Commercial & Industrial (loans)    NSFR: Net stable funding ratio
CMO: Collateralized mortgage obligation    MBS: Mortgage-backed securities
Cypress: Cypress Capital Management, LLC    OCC: Office of the Comptroller of the Currency
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010    OREO: Other real estate owned
DTA: Deferred tax asset    OTTI: Other-than-temporary impairment
Exchange Act: Securities Exchange Act of 1934   

Overview

Founded in 1832, the Bank is the seventh oldest bank and trust company continuously operating under the same name in the United States. 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 through our Wealth Management segment. The FDIC insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 63 offices located in Delaware (44), Pennsylvania (17), 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.

 

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Amounts subject to significant estimates are items such as the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, reverse mortgage loans, OTTI, and income tax valuation allowance. Among other effects, changes to such 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 GAAP, 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, 2016. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our 2015 Annual Report on Form 10-K that was filed with the SEC on February 29, 2016 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 2015 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those contained in our 2015 Annual Report on Form 10-K.

Common Stock Split

In March 2015, the Company’s Board of Directors adopted an amendment to the Company’s Certificate of Incorporation, to increase the number of shares of common stock the Company is authorized to issue from 20,000,000, par value $0.01 to 65,000,000, par value $0.01. This amendment to the Company’s Certificate of Incorporation was approved by the Company’s stockholders at the 2015 Annual Meeting held on April 30, 2015.

In May 2015, the Company effected a three-for-one stock split in the form of a stock dividend to shareholders of record as of May 4, 2015. All share and per share information has been retroactively adjusted to reflect the stock split. We retroactively adjusted stockholders’ equity to reflect the stock split by reclassifying an amount equal to the par value, $0.01, of the additional shares arising from the split from capital in excess of par value to common stock, resulting in no net impact to stockholders’ equity on our Consolidated Statements of Condition.

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 is 2,096,535. At March 31, 2016, there were 749,825 shares available for future grants under the 2013 Incentive Plan.

Stock-based compensation expense related to awards granted to Associates is recorded in salaries, benefits and other compensation; expense related to awards granted to directors is recorded in other operating expense. Total stock-based compensation expense recognized for the three months ended March 31, 2016 was $758,000 pre-tax ($430,000 after tax), or $0.01 per share. This compares to $842,000 pre-tax ($593,000 after tax), or $0.02 per share during the three months ended March 31, 2015.

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 market price of our common stock on the date of the grant. All stock options granted during 2016 and 2015 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.

 

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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. For stock options granted during 2016 we utilized our historical share option exercise experience to estimate the expected term of options. For stock options granted in 2015 we used the simplified method provided for in Staff Accounting Bulletin (SAB) Topic 14.D.2 to estimate the expected term of options as we did not believe our historical share option exercise experience was sufficient to provide a reasonable basis upon which to estimate expected term at that time. Other significant assumptions to determine 2016 and 2015 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 assumptions for options issued during the three months ended 2016 and 2015 are presented below:

 

     2016   2015

Expected term (in years)

   5.3   4.9

Volatility

   29.6%   25.0%

Weighted-average risk-free interest rate

   1.24%   1.54%

Dividend yield

   0.80%   0.76%

The following table provides information about our stock options outstanding as of March 31, 2016:

 

     March 31, 2016  
     Shares      Weighted-
Average
Exercise Price
 

Stock Options:

     

Outstanding at beginning of period

     1,647,878      $ 17.08  

Granted

     67,591        29.86  

Exercised

     (60,770      15.52  

Forfeited

     (2,622      14.75  
  

 

 

    

Outstanding at end of period

     1,652,077        17.67  

Exercisable at end of period

     901,777        16.53  

Weighted-average fair value of awards granted

   $ 7.84     

The following table provides information about our nonvested stock options outstanding at March 31, 2016:

 

     March 31, 2016  
     Shares      Weighted-
Average
Exercise Price
 

Stock Options:

     

Unvested at beginning of period

     1,028,142      $ 17.58  

Granted

     67,591        29.86  

Forfeited

     (1,461      14.97  

Vested

     (343,972      16.83  
  

 

 

    

Unvested at end of period

     750,300      $ 19.03  

The total amount of unrecognized compensation cost related to nonvested stock options as of March 31, 2016 was $3.2 million. The weighted-average period over which the expense is expected to be recognized is 2.2 years.

 

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Restricted Stock and Restricted Stock Units

Restricted stock awards (RSAs) and restricted stock units (RSUs) are granted at no cost to the recipient and generally vest over a four year period. RSA recipients are entitled to voting rights and generally entitled to dividends on the common stock during the vesting period. The fair value of RSAs and RSUs is equal to the fair value of the Company’s common stock on the date of grant. We recognize the expense related to RSAs and RSUs granted to Associates into salaries, benefits and other compensation expense and granted to directors into other operating expense on an accrual basis over the requisite service period for the entire award. When we award restricted stock to individuals from whom we may not receive services in the future, we recognize the expense of restricted stock grants when we make the award, instead of amortizing the expense over the vesting period of the 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 2016, we recognized $92,000 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, 2016:

 

     March 31, 2016  
            Weighted Average  
     Units (in whole)      Grant-Date Fair
Value per Unit
 

Outstanding at beginning of period

     171,834      $ 19.00  

Granted

     44,186        29.86  

Vested

     (71,932      16.45  

Forfeited

     (402      25.17  
  

 

 

    

Outstanding at end of period

     143,686      $ 23.60  

The total amount of compensation cost to be recognized relating to non-vested restricted stock, including performance awards, as of March 31, 2016, was $2.9 million. The weighted-average period over which the expense is expected to be recognized is 3.0 years.

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2016

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The standard update resolves the diverse accounting treatment for these share-based payments by requiring that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 will be effective for interim and annual reporting periods beginning after December 15, 2015. Early application is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach applies to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statement at adoption, and to all new or modified awards thereafter. The adoption of this accounting guidance did not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

 

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In April 2015, the FASB issued ASU No 2015-03, Interest- Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and is applied retrospectively. The Company adopted ASU 2015-03 in the first quarter of 2016, and applied its provisions retrospectively. The adoption of ASU 2015-03 resulted in the reclassification at March 31, 2016 and December 31, 2015, of $1.2 million and $1.3 million of unamortized debt issuance costs related to the Company’s senior debt from other assets to senior debt within its consolidated balance sheets. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity and also amends the criteria for consolidating such an entity. In addition, it amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. ASU No. 2015-02 requires entities to use a retrospective or a modified retrospective approach (recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year). The adoption of this accounting guidance did not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

Accounting Guidance Pending Adoption at March 31, 2016

In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-9 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 to financial statements issued for fiscal years beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Company does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

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 provides that equity investments will 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 will be 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 the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

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 simplified 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. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company’s management is currently evaluating the impact of adopting ASU 2016-02 on the Company’s consolidated financial statements.

 

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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 does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of 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 does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net, Revenue from Contracts with Customers (Topic 606). ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers , 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. The amendments in the standard affect the guidance in ASU 2014-09, which is 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 Company does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718). ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits and Deficiencies, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. The standard is effective for public business entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim or annual period provided that the entire standard is adopted. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company’s management is currently evaluating the impact of adopting ASU 2016-09 on the Company’s consolidated financial statements.

 

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2. BUSINESS COMBINATIONS

Penn Liberty Financial Corporation

On November 23, 2015, we along with Penn Liberty Financial Corporation (Penn Liberty) announced the signing of a definitive agreement and plan of reorganization whereby we would acquire Penn Liberty. Upon the closing of the transaction, Penn Liberty will merge into the Company and Penn Liberty Bank will merge into WSFS Bank. Penn Liberty is a locally managed institution with eleven branch locations and is headquartered in Wayne, Pennsylvania. It reported $704 million in assets, $510 million in loans and $621 million in deposits as of December 31, 2015. We expect this acquisition to build our market share, expand our customer base and enhance our fee income. The total transaction is valued at approximately $101 million, has received all necessary approvals and is expected to close in August 2016.

Alliance Bancorp, Inc. of Pennsylvania

On October 9, 2015 we completed the acquisition of Alliance and its wholly owned subsidiary, Alliance Bank, headquartered in Broomall, Pennsylvania. At that time Alliance merged into the Company and Alliance Bank merged into WSFS Bank. In accordance with the terms of the Agreement and Plan of Merger, dated March 2, 2015, holders of shares of Alliance common stock received, in aggregate, $26.6 million in cash and 2,459,120 shares of WSFS common stock. The transaction was valued at $97.9 million based on WSFS’ October 9, 2015 closing share price of $29.01 as quoted on NASDAQ. The results of the combined entity’s operations are included in our Consolidated Financial Statements since the date of the acquisition.

The acquisition of Alliance was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid 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. The excess of consideration paid over the preliminary fair value of net assets acquired was recorded as goodwill in the amount of $36.1 million, which will not be amortizable and is not deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. The Company also recorded $2.6 million in core deposit intangibles which are being amortized over ten years using the straight-line depreciation method and $511,000 for non-compete covenants which are being amortized between six and eighteen months.

In connection with the merger, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed, as of the date of acquisition, are summarized in the following table:

 

(In Thousands)    Fair Value  

Consideration Paid:

  

Common shares issued (2,459,120)

   $ 71,345  

Cash paid to Alliance stockholders

     26,576  
  

 

 

 

Value of consideration

     97,921  

Assets acquired:

  

Cash and due from banks

     67,439  

Investment securities

     3,002  

Loans

     307,695  

Premises and equipment

     2,685  

Deferred income taxes

     7,730  

Bank owned life insurance

     12,923  

Core deposit intangible

     2,635  

Other real estate owned

     768  

Other assets

     3,583  
  

 

 

 

Total assets

     408,460  

Liabilities assumed:

  

Deposits

     341,682  

Other Borrowings

     2,826  

Other liabilities

     2,098  
  

 

 

 

Total liabilities

     346,606  

Net assets acquired:

     61,854  
  

 

 

 

Goodwill resulting from acquisition of Alliance

   $ 36,067  
  

 

 

 

 

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The following table details the changes to goodwill in 2016:

 

(In Thousands)    Fair Value  

Goodwill resulting from the acquisition of Alliance reported as of December 31, 2015

   $ 36,425  

Effects of adjustments to:

  

Deferred income taxes

     (186

Other assets

     (597

Other liabilities

     425  
  

 

 

 

Adjusted goodwill resulting from the acquisition of Alliance as of March 31, 2016

   $ 36,067  
  

 

 

 

The adjustments made to goodwill during the first three months of 2016, reflect a change in the fair value of leases acquired, accrued expenses and deferred federal income taxes.

Direct costs related to the acquisition were expensed as incurred. During the three months ended March 31, 2016, the Company incurred $426,000 in merger expenses related to Alliance and Penn Liberty compared to $666,000 for the three months ended March 31, 2015.

3. EARNINGS PER SHARE

The following table shows the computation of basic and diluted earnings per share:

 

     Three Months Ended  
     March 31,  
(In Thousands, Except Per Share Data)    2016      2015  

Numerator:

     

Net income

   $ 15,770      $ 12,889  
  

 

 

    

 

 

 

Denominator:

     

Weighted average basic shares

     29,671        28,218  

Dilutive potential common shares

     558        535  
  

 

 

    

 

 

 

Weighted average fully diluted shares

     30,229        28,753  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.53      $ 0.46  
  

 

 

    

 

 

 

Diluted

   $ 0.52      $ 0.45  
  

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     42        238  

 

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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.

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
(In Thousands)    Cost      Gain      Loss      Value  

Available-for-Sale Securities:

           

March 31, 2016

           

GSE

   $ 39,088      $ 71       $ 1      $ 39,158   

CMO

     269,309        4,798         205        273,902   

FNMA MBS

     334,668        6,985         30        341,623   

FHLMC MBS

     99,317        1,679         78        100,918   

GNMA MBS

     18,627        501         17        19,111   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 761,009      $ 14,034       $ 331      $ 774,712   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

GSE

   $ 31,041      $ —         $ 127      $ 30,914   

CMO

     253,189        713         2,414        251,488   

FNMA MBS

     320,105        1,081         2,715        318,471   

FHLMC MBS

     99,350        405         313        99,442   

GNMA MBS

     20,387        420         93        20,714   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 724,072      $ 2,619       $ 5,662      $ 721,029   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
(In Thousands)    Cost      Gain      Loss      Value  

Held-to-Maturity Securities (a)

           

March 31, 2016

           

State and political subdivisions

   $ 166,962      $ 3,619       $ 41      $ 170,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

State and political subdivisions

   $ 165,862      $ 1,943       $ 62       $ 167,743  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 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 $2.7 million and $2.9 million at March 31, 2016 and December 31, 2015, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.

 

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Table of Contents

The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2016 and December 31, 2015 are presented in the table below:

 

     Available-for-Sale  
(In Thousands)    Amortized
Cost
     Fair
Value
 

March 31, 2016

     

Within one year

   $ 6,001      $ 6,003  

After one year but within five years

     33,087        33,155  

After five years but within ten years

     255,484        261,034  

After ten years

     466,437        474,520  
  

 

 

    

 

 

 
   $ 761,009      $ 774,712  
  

 

 

    

 

 

 

December 31, 2015

     

Within one year

   $ 3,997      $ 3,995  

After one year but within five years

     30,009        29,840  

After five years but within ten years

     218,023        215,018  

After ten years

     472,043        472,176  
  

 

 

    

 

 

 
   $ 724,072      $ 721,029  
  

 

 

    

 

 

 
     Held-to-Maturity  
(In Thousands)    Amortized
Cost
     Fair
Value
 

March 31, 2016

     

After one year but within five years

     3,229        3,249  

After five years but within ten years

     8,546        8,732  

After ten years

     155,187        158,559  
  

 

 

    

 

 

 
   $ 166,962      $ 170,540  
  

 

 

    

 

 

 

December 31, 2015

     

Within one year

   $ 1,486      $ 1,488  

After one year but within five years

     3,465        3,456  

After five years but within ten years

     7,939        8,045  

After ten years

     152,972        154,754  
  

 

 

    

 

 

 
   $ 165,862      $ 167,743  
  

 

 

    

 

 

 

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 $423.8 million and $457.0 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2016 and December 31, 2015, respectively.

During the first three months of 2016 and 2015, we sold $38.9 million and $37.4 million of investment securities categorized as available-for-sale, for a gain of $305,000 and $451,000, respectively. No losses were incurred from sales during the first three months of 2016 and 2015.

As of March 31, 2016 and December 31, 2015, our investment securities portfolio had remaining unamortized premiums of $18.7 million and $18.3 million and unaccreted discounts of $307,000 and $306,000, respectively.

 

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Table of Contents

For these 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, 2016.

 

     Duration of Unrealized Loss Position                
     Less than 12 months      12 months or longer      Total  
(In Thousands)    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Available-for-sale securities:

                 

GSE

   $ 2,018        1       $ —           —        $ 2,018      $ 1  

CMO

     15,643        110        14,686        95        30,329        205  

FNMA MBS

     8,721        30         —          —          8,721        30  

FHLMC MBS

     7,452        30        4,109        48        11,561        78  

GNMA MBS

     1,963        10        2,274        7        4,237        17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 35,797      $ 181      $ 21,069      $ 150      $ 56,866      $ 331  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or longer      Total  
(In Thousands)    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Held-to-maturity securities:

                 

State and political subdivisions

   $ —        $ —        $ 2,924      $ 41      $ 2,924      $ 41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ —        $ —        $ 2,924      $ 41      $ 2,924      $ 41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For these 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, 2015.

 

     Duration of Unrealized Loss Position         
     Less than 12 months      12 months or longer      Total  
(In Thousands)    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Available-for-sale securities:

                 

GSE

   $ 30,914      $ 127       $ —         $ —        $ 30,914      $ 127  

CMO

     139,486        1,703        26,536        711        166,022        2,414  

FNMA MBS

     214,465        2,715        —           —           214,465        2,715  

FHLMC MBS

     41,791        136        4,025        177        45,816        313  

GNMA MBS

     4,073        29        2,377        64        6,450        93  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 430,729      $ 4,710      $ 32,938      $ 952      $ 463,667      $ 5,662  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or longer      Total  
(In Thousands)    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Held-to-maturity securities:

                 

State and political subdivisions

   $ 9,845      $ 62       $ —         $ —        $ 9,845      $ 62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 9,845      $ 62       $ —         $ —        $ 9,845      $ 62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2016, we owned investment securities totaling $59.8 million in which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $372,000 at March 31, 2016. 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. In addition, 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.

 

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All securities, with the exception of one, were AA-rated or better at the time of purchase and remained investment grade at March 31, 2016. All securities were evaluated for OTTI at March 31, 2016 and December 31, 2015. The result of this evaluation showed no OTTI as of March 31, 2016 or December 31, 2015. The estimated weighted average duration of MBS was 4.1 years at March 31, 2016.

5. LOANS

The following details our loan portfolio by category:

 

(In Thousands)    March 31,
2016
     December 31,
2015
 

Commercial and industrial

   $ 1,083,121      $ 1,061,597  

Owner occupied commercial

     895,457        880,643  

Commercial mortgages

     987,066        966,698  

Construction

     227,348        245,773  

Residential

     251,065        259,679  

Consumer

     359,656        360,249  
  

 

 

    

 

 

 
   $ 3,803,713      $ 3,774,639  

Less:

     

Deferred fees, net

   $ 8,428      $ 8,500  

Allowance for loan losses

     37,556        37,089  
  

 

 

    

 

 

 

Net loans

   $ 3,757,729      $ 3,729,050  
  

 

 

    

 

 

 

The following is 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:

 

(In Thousands)    March 31,
2016
     December 31,
2015
 

Outstanding principal balance

   $ 37,041        38,067  

Carrying amount

     32,165        32,658  

Allowance for loan losses

     119        132  

The following table presents the changes in accretable yield on the acquired credit impaired loans for the following three month period:

 

(In Thousands)    January 1 through
March 31, 2016
 

Balance at beginning of period

   $ 4,764  

Accretion

     (592

Reclassification from nonaccretable difference

     —    

Additions/adjustments

     (116

Disposals

     (7
  

 

 

 

Balance at the end of the period

   $ 4,049  
  

 

 

 

 

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6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized. We established our allowance for loan losses in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102) and FASB ASC 450, Contingencies (ASC 450). 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 upon 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

 

    Allowance for model estimation and complexity risk

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, 2016, net charge-offs totaled $313,000 or 0.03% of average loans, compared to $705,000, or 0.09% of average loans annualized, during the three months ended March 31, 2015.

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 into the following segments: commercial, owner-occupied, commercial real estate 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 21 quarters. During the three months ended March 31 2016, we increased the look-back period to 21 quarters from the 20 quarters used at December 31, 2015. 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 21 quarter look-back period.

Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration the following:

 

    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

 

    A competitive environment as it could impact loan structure and underwriting

 

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Table of Contents

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 or subtract to core reserves. Continued economic improvement and continued refinement of the quantitative model have driven an overall reduction in qualitative factors during the period.

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 8 quarters as of March 31, 2016. Further, our residential mortgage and consumer LEP remained at 4 quarters as of March 31, 2016. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our commercial LEP at least annually.

The final component of the allowance is a reserve for model estimation and complexity risk. The calculation of this reserve is generally quantitative; however, qualitative estimates of valuations and risk assessment, and methodology judgments are necessary in order to capture factors not already included in other components in our allowance for loan losses methodology. We review the qualitative estimates of valuation factors quarterly and management uses its judgment to make adjustments based on current trends.

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 three months ended March 31, 2016:

 

(In Thousands)

  Commercial     Owner-Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Complexity
Risk (1)
    Total  

Three months ended March 31, 2016

         

Allowance for loan losses

             

Beginning balance

  $ 11,156     $ 6,670     $ 6,487     $ 3,521     $ 2,281     $ 5,964     $ 1,010     $ 37,089  

Charge-offs

    (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 evaluated for:

         

Loans individually evaluated for impairment

  $ 5,278     $ 1,270     $ 2,678     $ 1,419     $ 15,260     $ 7,795     $ —       $ 33,700 (2)  

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

  $ 1,083,121     $ 895,457     $ 987,066     $ 227,348     $ 251,065     $ 359,656     $ —       $ 3,803,713 (3)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three ended March 31, 2015:

 

(In Thousands)

   Commercial     Owner-Occupied
Commercial
    Commercial
Mortgages
    Construction      Residential     Consumer     Complexity
Risk  (1)
     Total  

Three months ended March 31, 2015

                  

Allowance for loan losses

                  

Beginning balance

   $ 12,837     $ 6,643     $ 7,266     $ 2,596      $ 2,523     $ 6,041     $ 1,520      $ 39,426  

Charge-offs

     (131     (330     (39     —          (125     (450     —          (1,075

Recoveries

     26       4       79       49        11       201       —          370  

Provision (credit)

     316       722       (782     307        (29     234       18        786  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,048     $ 7,039     $ 6,524     $ 2,952      $ 2,380     $ 6,026     $ 1,538      $ 39,507  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Period-end allowance allocated to:

                  

Loans individually evaluated for impairment

   $ 3,169     $ 284     $ 223     $ 210      $ 751     $ 197     $ —        $ 4,834  

Loans collectively evaluated for impairment

     9,879       6,755       6,301       2,742        1,629       5,829       1,538        34,673  

Acquired loans evaluated for impairment

     —          —          —          —           —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,048     $ 7,039       6,524     $ 2,952      $ 2,380     $ 6,026     $ 1,538      $ 39,507  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Period-end loan balances evaluated for:

                  

Loans individually evaluated for impairment

   $ 11,707     $ 1,552     $ 7,595     $ 1,419      $ 14,749     $ 6,157     $ —        $ 43,179 (2)  

Loans collectively evaluated for impairment

     876,434       754,044       770,991       138,495        184,337       310,427       —          3,034,728  

Acquired nonimpaired loans

     31,737       39,671       36,373       9,680        16,615       7,640       —          141,716  

Acquired impaired loans

     3,192       2,133       5,877       3,630        496       8       —          15,336  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 923,070     $ 797,400     $ 820,836     $ 153,224      $ 216,197     $ 324,232     $ —        $ 3,234,959 (3)  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)   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.
(2)   The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $13.9 million and $22.5 million for the periods ending March 31, 2016 and 2015, respectively. Accruing troubled debt restructured loans are considered impaired loans.
(3)   Ending loan balances do not include deferred costs.

Nonaccrual and Past Due Loans

Nonaccruing loans are those on which the accrual of interest has ceased. 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 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 remain in accrual status because they are considered well secured and in the process of collection.

 

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

 

March 31, 2016

(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

  $ 1,378     $ 1,354     $ —       $ 2,732     $ 1,062,856     $ 12,600     $ 4,933     $ 1,083,121  

Owner-Occupied commercial

    678       —         —         678       888,907       4,603       1,269       895,457  

Commercial mortgages

    127       —         —         127       973,786       10,557       2,596       987,066  

Construction

    —         —         —         —         223,784       3,564       —         227,348  

Residential

    4,332       418       —         4,750       238,482       955       6,878       251,065  

Consumer

    851       339       127       1,317       354,219       5       4,115       359,656  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

  $ 7,366     $ 2,111     $ 127     $ 9,604     $ 3,742,034     $ 32,284     $ 19,791     $ 3,803,713  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

    0.19     0.06 %     —   %     0.25 %     98.38     0.85 %     0.52 %     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)    The balances of above include $354.7 million of acquired nonimpaired loans.

 

       

December 31, 2015

(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

  $ 1,686     $ 270     $ 12,355     $ 14,311     $ 1,028,973     $ 12,985     $ 5,328     $ 1,061,597  

Owner-Occupied commercial

    713       217       4,886       5,816       869,048       4,688       1,091       880,643  

Commercial mortgages

    141       4       288       433       952,426       10,513       3,326       966,698  

Construction

    —         —         —         —         242,229       3,544       —         245,773  

Residential

    5,263       621       251       6,135       245,307       950       7,287       259,679  

Consumer

    1,222       36       252       1,510       354,599       7       4,133       360,249  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

  $ 9,025     $ 1,148     $ 18,032     $ 28,205     $ 3,692,582     $ 32,687     $ 21,165     $ 3,774,639  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

    0.24 %     0.03 %     0.48 %     0.75 %     97.83 %     0.86 %     0.56 %     100 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The balances of above include $371.1 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.

 

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Table of Contents

The following tables provide an analysis of our impaired loans at March 31, 2016 and December 31, 2015:

 

March 31, 2016

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Related
Reserve  (1)
     Loans with
Related
Reserve
     Related
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 5,728       $ 947       $ 4,781       $ 1,477       $ 12,187       $ 8,060   

Owner-Occupied commercial

     2,281         1,269         1,012         22         2,488         6,329   

Commercial mortgages

     3,980         2,678         1,302         89         6,626         2,412   

Construction

     1,419         —           1,419         211         1,419         1,448   

Residential

     15,421         8,618         6,803         915         18,395         15,215   

Consumer

     7,794         6,585         1,209         208         9,610         7,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

   $ 36,623       $ 20,097       $ 16,526       $ 2,922       $ 50,725       $ 40,548   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Reflects loan balances at or written down to their remaining book balance.
(2)   The above includes acquired impaired loans totaling $2.9 million in the ending loan balance and $3.5 million in the contractual principal balance.

 

December 31, 2015

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Related
Reserve  (1)
     Loans with
Related
Reserve
     Related
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 6,137      $ 951      $ 5,186      $ 1,168      $ 20,206      $ 9,391  

Owner-Occupied commercial

     2,127        1,090        1,037        22        2,947        2,111  

Commercial mortgages

     4,652        3,410        1,242        103        11,826        7,540  

Construction

     1,419        —          1,419        211        1,419        1,448  

Residential

     15,710        9,034        6,676        920        18,655        15,264  

Consumer

     7,665        6,498        1,167        200        9,353        6,801  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

   $ 37,710      $ 20,983      $ 16,727      $ 2,624      $ 64,406      $ 42,555  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Reflects loan balances at or written down to their remaining book balance.
(2)   The above includes acquired impaired loans totaling $2.9 million in the ending loan balance and $3.5 million in the contractual principal balance.

Interest income of $156,000, and $472,000 was recognized on impaired loans during the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, there were 40 residential loans and 7 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $6.3 million and $667,000, respectively. As of December 31, 2015, there were 32 residential loans and 3 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $5.0 million and $675,000, respectively.

Reserves on Acquired Nonimpaired Loans

In accordance with FASB ASC 310, loans acquired by the Bank through its merger with FNBW and Alliance are required to be reflected on the balance sheet at their fair values on the date of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance.

Credit Quality Indicators

Below is a description of each of our risk ratings for all commercial loans:

Pass . These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible.

 

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Table of Contents

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. The 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

 

(In Thousands)   Commercial     Owner-Occupied
Commercial
    Commercial
Mortgages
    Construction     Total
Commercial (1)
 
                                              Mar. 31,
2016
    Dec. 31,
2015
 
    Mar. 31,
2016
    Dec. 31
2015
    Mar. 31,
2016
    Dec. 31
2015
    Mar. 31,
2016
    Dec. 31
2015
    Mar. 31,
2016
    Dec. 31
2015
    Amount     %     Amount     %  

Risk Rating:

                       

Special mention

  $ 6,992     $ 5,620     $ 11,982     $ 9,535     $ 8,900     $ 12,323     $ —       $ —       $ 27,874       $ 27,478    

Substandard:

                   

Accrual

    36,428       33,883       20,905       22,901       2,523       2,547       8,322       8,296       68,178         67,627    

Nonaccrual

    3,525       4,164       1,269       1,090       2,596       3,326       —         —         7,390         8,580    

Doubtful

    1,408       1,164       —         —         —         —         —         —         1,408         1,164    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special and Substandard

    48,353       44,831       34,156       33,526       14,019       18,196       8,322       8,296       104,850       3     104,849       3

Acquired impaired

    12,600       12,985       4,603       4,688       10,557       10,513       3,564       3,544       31,324       1       31,730       1  

Pass

    1,022,168       1,003,781       856,698       842,429       962,490       937,989       215,462       233,933       3,056,818       96       3,018,132       96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,083,121     $ 1,061,597     $ 895,457     $ 880,643     $ 987,066     $ 966,698     $ 227,348     $ 245,773     $ 3,192,992       100   $ 3,154,711       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)   Table includes $265.7 million and $277.0 million of acquired nonimpaired loans as of March 31, 2016 and December 31, 2015, respectively.

 

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Table of Contents

Residential and Consumer Credit Exposure

 

(In Thousands)    Residential      Consumer      Total Residential and Consumer (2)  
     Mar. 31,      Dec. 31      Mar. 31,      Dec. 31      Mar. 31, 2016     Dec. 31, 2015  
     2016      2015      2016      2015      Amount      Percent     Amount      Percent  
                      

 

 

 

Nonperforming(1)

   $ 15,260      $ 15,548      $ 7,794      $ 7,664      $ 23,054          $ 23,212       

Acquired impaired loans

     955        950        5        7        960        —         957        —    

Performing

     234,850        243,181        351,857        352,578        586,707        96       595,759        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 251,065      $ 259,679      $ 359,656      $ 360,249      $ 610,721        100    $ 619,928        100 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1)   Includes $12.1 million as of March 31, 2016 and $13.6 million as of December 31, 2015 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) Total includes $89.0 million and $94.2 million in acquired nonimpaired loans as of March 31, 2016 and December 31, 2015, respectively.

Troubled Debt Restructurings (TDR)

TDRs are recorded in accordance with FASB ASC 310-40, Troubled Debt Restructuring by Creditors (ASC 310-40) . The balance of TDRs at March 31, 2016 and December 31, 2015 was $25.6 million and $24.6 million, respectively. The balance at March 31, 2016 included approximately $11.7 million of TDRs in nonaccrual status and $13.9 million of TDRs in accrual status compared to $11.0 million in nonaccrual status and $13.6 million in accrual status at December 31, 2015. Approximately $2.7 million and $2.1 million in related reserves have been established for these loans at March 31, 2016 and December 31, 2015, respectively.

During the three months ended March 31, 2016, the terms of 8 loans were modified in TDRs. Five modifications were for consumer loans of which all were HELOC conversions with interest rate reductions. Two were residential mortgages of which both were forbearance agreements. One commercial loan in bankruptcy was granted interest only payments. Our concessions on restructured loans typically consist of forbearance agreements, reduction in interest rates or extensions of maturities. 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, 2016 and 2015.

 

(In Thousands)

   Three
Months Ended
March 31,
2016
     Three
Months Ended
March 31,
2015
 

Commercial

   $ 984      $ —    

Owner Occupied Commercial

     —           —    

Commercial mortgages

     —          —    

Construction

     —          —    

Residential

     614        212  

Consumer

     215        135  
  

 

 

    

 

 

 

Total

   $ 1,813      $ 347  
  

 

 

    

 

 

 

During the three months ended March 31, 2016, the TDRs set forth in the table above had no change on our allowance for loan losses allocation of a related reserve, and resulted in charge-offs of $80,000. For the same period of 2015, there was no change to our allowance for loan losses and no additional charge-offs.

 

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7. REVERSE MORTGAGE LOANS

Reverse mortgage loans are contracts in which a homeowner borrows against the equity in his/her home and receives cash in one lump sum payment, a line of credit, fixed monthly payments for either a specific term or for as long as the homeowner lives in the home, or a combination of these options. Since reverse mortgages are nonrecourse obligations, the loan repayments are generally limited to the sale proceeds of the borrower’s residence and the mortgage balance consists of cash advanced, interest compounded over the life of the loan and some may include a premium which represents a portion of the shared appreciation in the home’s value, if any, or a percentage of the value of the residence.

Our investment in reverse mortgages totaled $24.7 million at March 31, 2016. The portfolio consists of 90 loans with an average borrowers’ age of 94 years old and there is currently significant overcollateralization in the portfolio, as the realizable collateral value (the lower of collectible principal and interest, or appraised value and annual broker price opinion of the home) of $45.6 million exceeds the outstanding book balance at March 31, 2016. Broker price opinions are updated at least annually. Additional broker price opinions are obtained when our quarterly review indicates that a home’s value has increased or decreased by at least 50% during any given period.

The carrying value of the reverse mortgages is calculated using a proprietary model that uses the income approach as described in FASB ASC 820-10, Fair Value Measurements and Disclosure (ASC 820-10). The model is a present value cash flow model which describes the components of a present value measurement. The model incorporates the projected cash flows of the loans (includes payouts and collections) and then discounts these cash flows using the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is liquidated. The inputs to the model reflect our expectations of what other market participants would use in pricing this asset in a current transaction and therefore is consistent with ASC 820 that requires an exit price methodology for determining fair value.

To determine the carrying value of these reverse mortgages as of March 31, 2016, we used the proprietary model described above and actual cash flow information to estimate future cash flows. There are three main drivers of cash flows; 1) move-out rates, 2) house price appreciation (HPA) forecasts, and 3) internal rate of return.

 

  1) Move-out rates – We used the actuarial estimates of contract termination provided in the United States Mortality Rates Period Life Table, 2011, published by the Office of the Actuary - Social Security in 2015, adjusted for expected prepayments and relocations which we adopted during 2016.

 

  2) House Price Appreciation – We utilize house price forecasts from various market sources. Based on this information, we forecasted a 2.5% increase in housing prices during 2016 and a 2.0% increase in the following year and thereafter. We believe this forecast continues to be appropriate given the nature of reverse mortgage collateral and historical under-performance to the broad housing market. Annually, during the fourth quarter, current collateral values are updated through broker price opinions.

 

  3) Internal Rate of Return – As of March 31, 2016, the internal rate of return (IRR) of 19.32% was the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is liquidated.

 

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Table of Contents

As of March 31, 2016, the Company’s actuarially estimated cash payments to reverse mortgagors are as follows:

 

(In thousands)       

Year Ending

      

2016

   $ 580  

2017

     435  

2018

     342  

2019

     266  

2020

     204  

Years 2021 - 2025

     466  

Years 2026 - 2030

     92  

Years 2031 - 2035

     13  

Thereafter

     2  
  

 

 

 

Total (1)

   $ 2,400  
  

 

 

 

 

(1) This table does not take into consideration cash inflow including payments from mortgagors or payoffs based on contractual terms.

The amount of the contract value that would be forfeited if we were not to make cash payments to reverse mortgagors in the future is $6.2 million.

The future cash flows depend on the HPA assumptions. If the future changes in collateral value were assumed to be zero, income would decrease by $745,000 for the quarter ended March 31, 2016 with an IRR of 18.41%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $343,000 with an IRR of 18.90%.

The net present value of the projected cash flows depends on the IRR used. If the IRR increased by 1%, the net present value would increase by $984,000. If the IRR decreased by 1%, the net present value would decrease by $957,000.

8. 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, 2016, we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

The following table shows the allocation of goodwill to our reportable operating segments for purposes of goodwill impairment testing:

 

(In Thousands)    WSFS
Bank
     Cash
Connect
     Wealth
Management
     Consolidated
Company
 

December 31, 2015

   $ 80,078      $ —        $ 5,134      $ 85,212  

Changes in goodwill

     (358      —          —          (358
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2016

   $ 79,720      $ —        $ 5,134      $ 84,854  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

The following table summarizes other intangible assets:

 

(In Thousands)    Gross
Intangible
Assets
     Accumulated
Amortization
     Net
Intangible
Assets
 

March 31, 2016

        

Core deposits

   $ 10,245      $ (4,807    $ 5,438  

CB&T intangibles

     3,142        (1,230      1,912  

Array and Arrow intangibles

     2,353        (934      1,419  

Mortgage servicing rights

     1,503        (976      527  

Alliance intangible assets

     650        (228      422  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 17,893      $ (8,175    $ 9,718  
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Core deposits

   $ 10,246      $ (4,512    $ 5,734  

CB&T intangibles

     3,142        (1,181      1,961  

Array and Arrow intangibles

     2,353        (847      1,506  

Mortgage servicing rights

     1,430        (949      481  

Alliance intangible assets

     511        (110      401  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 17,682      $ (7,599    $ 10,083  
  

 

 

    

 

 

    

 

 

 

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, 2016, we recognized amortization expense on other intangible assets of $549,000.

The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2016

   $ 1,396  

2017

     1,543  

2018

     1,407  

2019

     1,338  

2020

     1,171  

Thereafter

     2,863  
  

 

 

 

Total

   $ 9,718  
  

 

 

 

 

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Table of Contents

9. ASSOCIATE BENEFIT PLANS

Postretirement Benefits

We account for our obligations under the provisions of FASB ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that the costs of these benefits be recognized 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 benefits measured at January 1, 2016 and 2015.

 

     Three months ended  
     March 31,  
(In Thousands)    2016      2015  

Service cost

   $ 15      $ 15  

Interest cost

     19        22  

Prior service cost amortization

     (7      (19

Net gain recognition

     (15      (5
  

 

 

    

 

 

 

Net periodic benefit cost

   $ 12       $ 13  
  

 

 

    

 

 

 

10. 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 upon 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, 2016. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2012 through 2015 tax years are subject to examination as of March 31, 2016. Pennsylvania is currently auditing our 2012 state tax return. We do not expect to record or realize any material unrecognized tax benefits during 2016.

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, $390,000 of such amortization has been reflected as income tax expense for the three months ended March 31, 2016, compared to $495,000 for the same period in 2015.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the three months ended March 31, 2016 were $368,000, $390,000 and $89,000, respectively. The carrying value of the investment in affordable housing credits is $11.6 million at March 31, 2016, compared to $12.0 million at December 31, 2015.

 

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Table of Contents

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.

The following tables present financial instruments carried at fair value as of March 31, 2016 and December 31, 2015 by valuation hierarchy (as described above):

 

(In Thousands)

Description

  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

  $ —        $ 273,902      $ —        $ 273,902   

FNMA MBS

    —          341,623        —          341,623   

FHLMC MBS

    —          100,918        —          100,918   

GNMA MBS

    —          19,111        —          19,111   

GSE

    —          39,158        —          39,158   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

  $ —        $ 774,712      $ —        $ 774,712   

Assets measured at fair value on a nonrecurring basis

       

Other real estate owned

  $ —        $ —        $ 3,979      $ 3,979   

Loans held-for-sale

    —          36,178        —          36,178   

Impaired loans

    —          —          33,701        33,701   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

  $ —        $ 36,178      $ 37,680      $ 73,858   

 

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Table of Contents

(In Thousands)

Description

   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

   $ —        $ 251,488      $ —        $ 251,488  

FNMA MBS

     —          318,471        —          318,471  

FHLMC MBS

     —          99,442        —          99,442  

GNMA MBA

     —          20,714        —          20,714  

GSE

        30,914        —          30,914  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —        $ 721,029      $ —        $ 721,029  

Assets measured at fair value on a nonrecurring basis

           

Other real estate owned

   $ —        $ —        $ 5,080      $ 5,080  

Loans held-for sale

     —          41,807        —          41,807  

Impaired loans (collateral dependent)

     —          —          35,086        35,086  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —        $ 41,807      $ 40,166      $ 81,973  

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ending March 31, 2016 and no material liabilities measured at fair value as of March 31, 2016 and December 31, 2015.

Fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon 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, 2016 securities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are approximately $39.2 million in U.S. Treasury Notes and Federal Agency debentures, and $735.6 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 upon estimates using Level 2 inputs. These inputs are based upon pricing information obtained from secondary markets and brokers and applied to loans with similar interest rates and maturities.

 

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Table of Contents

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.

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 has a gross amount of $36.6 million and $37.7 million at March 31, 2016 and December 31, 2015, respectively. The valuation allowance on impaired loans was $2.9 million as of March 31, 2016 and $2.6 million as of December 31, 2015.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents

For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Investment securities

Fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology.

Loans held-for sale

Loans held-for- sale are carried at their fair value (see discussion earlier in the note).

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans 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 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.

Reverse mortgage loans

The fair value of our investment in reverse mortgages is based on the net present value of estimated cash flows, which have been updated to reflect recent external appraisals of the underlying collateral. For additional information on reverse mortgage loans, see Note 7, Reverse Mortgage Loans, to the unaudited Consolidated Financial Statements.

 

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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 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 2015 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, 2016, and the evaluation showed no OTTI as of March 31, 2016. 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 Class B shares to be $13.1 million as of March 31, 2016.

Deposits

The fair value 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.

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:

 

     Fair Value    March 31, 2016      December 31, 2015  
(In Thousands)    Measurement    Book Value      Fair Value      Book Value     Fair Value  

Financial assets:

             

Cash and cash equivalents

   Level 1    $ 590,028        590,028      $ 561,179     $ 561,179  

Investment securities available-for-sale

   Level 2      774,712        774,712        721,029       721,029  

Investment securities held-to-maturity

   Level 2      166,962        170,540        165,862       167,743  

Loans, held-for-sale

   Level 2      36,178        36,178        41,807       41,807  

Loans, net (1)

   Level 2      3,724,028        3,685,174        3,693,964       3,637,714  

Impaired loans, net

   Level 3      33,701        33,701        35,086       35,086  

Reverse mortgage loans

   Level 3      24,739        24,739        24,284       24,284  

Stock in FHLB of Pittsburgh

   Level 2      30,711        30,444        30,519       30,519  

Accrued interest receivable

   Level 2      13,992        13,992        14,040       14,040  

Other assets

   Level 3      7,568        17,123        8,669       18,416  

Financial liabilities:

             

Deposits

   Level 2      4,068,771        3,890,594        4,016,566       3,791,606  

Borrowed funds

   Level 2      971,264        973,805        932,886       933,905  

Standby letters of credit

   Level 3      204        204        195       195  

Accrued interest payable

   Level 2      1,340        1,340        801       801  

 

(1)        Excludes impaired loans, net.

          

 

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At March 31, 2016 and December 31, 2015 we had no commitments to extend credit measured at fair value.

12. SEGMENT INFORMATION

In accordance with FASB ASC 280, Segment Reporting (ASC 280) we discuss our business in three segments. 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. We have 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. 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. Because of these and other reasons, 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 four 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. 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. 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, 2016 and March 31, 2015 follows:

For the three months ended March 31, 2016:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 48,038      $ —        $ 2,008      $ 50,046  

Noninterest income

     9,852        7,673        5,545        23,070  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     57,890        7,673        7,553        73,116  
  

 

 

    

 

 

    

 

 

    

 

 

 

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        7,866        9,472        78,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     4,497        —          193        4,690  

Noninterest expenses

     33,812        4,850        4,537        43,199  

Provision for loan losses

     815        —          (35      780  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     39,124        4,850        4,695        48,669  
  

 

 

    

 

 

    

 

 

    

 

 

 

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        6,120        6,546        53,902  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  

As of March 31, 2016:

           

Statement of Condition

           

Cash and cash equivalents

   $ 74,695      $ 513,813      $ 1,520      $ 590,028  

Goodwill

     79,720        —          5,134        84,854  

Other segment assets

     4,812,640        3,173        194,299        5,010,112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,967,055      $ 516,986      $ 200,953      $ 5,684,994  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the three months ended March 31, 2015:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

        

Interest income

   $ 40,823      $ —        $ 2,028      $ 42,851  

Noninterest income

     9,189        6,639        5,267        21,095  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     50,012        6,639        7,295        63,946  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

        

Interest income

     871        —          1,447        2,318  

Noninterest income

     1,784        168        18        1,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,655        168        1,465        4,288  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     52,667        6,807        8,760        68,234  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

        

Interest expense

     3,912        —          122        4,034  

Noninterest expenses

     31,079        4,175        3,659        38,913  

Provision for loan losses

     733        —          53        786  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     35,724        4,175        3,834        43,733  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

        

Interest expense

     1,447        373        498        2,318  

Noninterest expenses

     186        614        1,170        1,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,633        987        1,668        4,288  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     37,357        5,162        5,502        48,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 15,310      $ 1,645      $ 3,258      $ 20,213  

Income tax provision

              7,324  
           

 

 

 

Consolidated net income

              12,889  
           

 

 

 

Capital expenditures (1)

   $ 497      $ 234      $ 3      $ 734  

As of December 31, 2015:

        

Statement of Condition

        

Cash and cash equivalents

   $ 65,663      $ 493,165      $ 2,351      $ 561,179  

Goodwill

     80,078        —          5,134        85,212  

Other segment assets

     4,746,995        —          192,576        4,939,571  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,892,736      $ 493,165      $ 200,061      $ 5,585,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Capital expenditures amounts have been adjusted to correct errors that were not material to our Form 10-Q for the quarterly period ended March 31, 2015. Previously reported capital expenditures were $817,000 for WSFS Bank, $0 for Cash Connect, $0 for Wealth Management, and $817,000 for Total Consolidated Company.

 

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13. INDEMNIFICATIONS AND GUARANTEES

Secondary Market Loan Sales

Given the current interest rate environment, coupled with our desire not to hold these assets in our portfolio, we generally sell newly originated residential mortgage loans 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 Condition at fair value with changes in the value reflected in our unaudited Consolidated Statements of Cash Flows and Comprehensive Income. Gains and losses are recognized at the time of sale. We periodically retain the servicing rights on residential mortgage loans sold which result in monthly service fee income and are included in our intangible assets in our unaudited Consolidated Statements of 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 the guidance promulgated in FASB 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, 2016.

Swap Guarantees.

We entered into agreements with five unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event 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 smaller financial institutions like 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 under ASC 815 .

At March 31, 2016 there were 123 variable-rate to fixed-rate swap transactions between the third party financial institutions and our customers, compared to 119 at December 31, 2015. The initial notional aggregated amount was approximately $488.9 million at March 31, 2016 compared to $481.6 million at December 31, 2015. At March 31, 2016 maturities ranged from four months to over 10 years. The aggregate market value of these swaps to the customers was a liability of $27.0 million at March 31, 2016 and $18.1 million at December 31, 2015. There were no reserves for the swap guarantees as of March 31, 2016.

 

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14. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes unrealized gains and losses on available-for-sale investments and unrecognized prior service costs on defined benefit pension plans. Changes to accumulated other comprehensive income are presented net of tax effect as a component of equity. Reclassification out of accumulated other comprehensive income is recorded on the statement of operations either as a gain or loss.

Changes to accumulated other comprehensive income by component are shown net of taxes in the following tables for the three month periods indicated:

 

(In Thousands)    Net change in
investment securities
available-for-sale
     Net change in
securities held-to-
maturity
     Net change in
defined benefit
plan
     Total  

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2014

   $ 446      $ 2,207      $ 847      $ 3,500  

Other comprehensive income before reclassifications

     4,567        —          —          4,567  

Less: Amounts reclassified from accumulated other comprehensive loss

     (280      (171      (15      (466
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     4,287        (171      (15      4,101  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, March 31, 2015

   $ 4,733      $ 2,036      $ 832      $ 7,601  
  

 

 

    

 

 

    

 

 

    

 

 

 

The statements of operations impacted by components of other comprehensive income are presented in the table below:

 

(In Thousands)

   Three Months Ended
March 31,
   

Affected line item in Statements of

Operations

   2016     2015      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ (305   $ (451  

Security gains, net

Income taxes

     116       171    

Income tax provision

  

 

 

   

 

 

   

Net of tax

   $ (189   $ (280  
  

 

 

   

 

 

   

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

   $ (168   $ (171  

Interest income on investment securities

Income taxes

     65       —      

Income tax provision

  

 

 

   

 

 

   

Net of tax

   $ (103   $ (171  
  

 

 

   

 

 

   

Amortization of Defined Benefit Pension items:

      

Prior service (credits) costs

   $ (7   $ (19  

Transition obligation

       —      

Actuarial losses (gains)

     791       (5  
  

 

 

   

 

 

   

Total before tax

   $ 784     $ (24  

Salaries, benefits and other compensation

Income taxes

     (306     9    

Income tax provision

  

 

 

   

 

 

   

Net of tax

     478       (15  
  

 

 

   

 

 

   

Total reclassifications

   $ 186     $ (466  
  

 

 

   

 

 

   

 

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15. LEGAL AND OTHER PROCEEDINGS

As initially disclosed in 2011, we were served with a complaint, filed in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, by a bankruptcy trustee relating to a former WSFS Bank customer. The complaint challenges the Bank’s actions relating to the repayment of an outstanding loan and also seeks to avoid and recover the pre-bankruptcy repayment of that loan, approximately $5.0 million. The matter has been captioned Goldstein v. Wilmington Savings Fund Society, FSB (In re: Universal Marketing, Inc.), Chapter 7, Case No. 09-15404 (ELF), Adv. Pro. No. 11-00512. We believe we acted appropriately and we are vigorously defending ourselves against the complaint.

On November 24, 2015 the Court entered summary judgment in favor of WSFS Bank on all but one of the remaining counts, leaving one count for resolution at trial. Based upon available information we believe the estimate of the aggregate range of reasonably possible losses for this legal proceeding is from approximately $0 to approximately $5.0 million at March 31, 2016. Costs of litigation were initially covered by insurance; however, such costs have now exceeded the limits of insurance coverage for this case.

Four purported shareholder derivative and class action complaints relating to the October 2015 merger with Alliance were filed during the quarter ended June 30, 2015. These actions were consolidated under the caption In re: Alliance Bancorp, Inc. of Pennsylvania Derivative and Class Action Litigation, Court of Common Pleas of Delaware County, Pennsylvania, Consol. Action Lead Case No. 2015-3606 (Civil Div.) (the Alliance Action). The complaint named as defendants Alliance Bancorp, Inc. of Pennsylvania, its directors and certain of its officers, and the Company (the Defendants).

As previously disclosed, on June 11, 2015, solely to avoid the costs, risks and uncertainties inherent in litigation, Alliance, WSFS and the other Defendants entered into a Memorandum of Understanding (the MOU) with the plaintiffs ( the Plaintiffs) regarding the settlement of the Alliance Action. Pursuant to the MOU, Alliance filed with the SEC and made publicly available to Alliance shareholders supplemental disclosures, and the Plaintiffs agreed to release Alliance, WSFS and the other Defendants from all claims related to the Merger Agreement and the proposed merger, subject to approval of the Court of Common Pleas of Delaware County (the Court). In the MOU, the parties agreed to negotiate in good faith to prepare a stipulation of settlement to be filed with the Court and other documentation as may be required to effectuate the settlement. Management does not expect this settlement to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition. There can be no assurance that the parties ultimately will enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. The proposed settlement contemplated by the MOU will become void in the event that the parties do not enter into such stipulation or the Court does not approve the settlement.

Additionally, in 2013 a regulatory inquiry commenced into the registered transfer agent (“RTA”) activities of WSFS, as successor to Christiana Bank & Trust. As a result of issues arising from that inquiry, WSFS revamped Christiana Trust’s RTA policies and procedures and remediated all deficiencies. We have included the estimated financial liability from the expected resolution of this inquiry, which is not material, in our Consolidated Financial Statements as of March 31, 2016.

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.

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.

16. SUBSEQUENT EVENTS

We reviewed subsequent events and determined that no further disclosures or measurements were required.

 

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ITEM 2. MANAGEMENT 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, the seventh oldest bank and trust company continuously operating under the same name in the United States. At $5.7 billion in assets and $13.1 billion in fiduciary assets, WSFS Bank is also the largest bank and trust company headquartered in Delaware and 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 184 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 service and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $3.2 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, 2016, we service our customers primarily from our 63 offices located in Delaware (44), Pennsylvania (17), 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.

On November 23, 2015, we announced the signing of an Agreement and Plan of Reorganization with Penn Liberty Financial Corp. (Penn Liberty) whereby Penn Liberty will merge into the Company and Penn Liberty Bank, a Pennsylvania – chartered bank and wholly owned subsidiary of Penn Liberty will merge into WSFS Bank. The company has obtained all required approvals to acquire Penn Liberty including Penn Liberty shareholder approval and regulatory approvals. The acquisition is subject to customary closing conditions.

The Cash Connect segment is a premier provider of ATM Vault Cash and smart safe and cash logistics in the United States. It manages $711 million in vault cash in over 17,000 non-bank ATMs nationwide and 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 442 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 16-year history, Cash Connect periodically has been exposed to theft 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 four businesses. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress is a registered investment advisor with approximately $634 million in assets under management. Cypress’ primary market segment is high net worth individuals and offers a ‘balanced’ investment style focused on preservation of capital and providing for current income. Christiana Trust, with $12.47 billion in assets under management and administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, custodial and commercial domicile services to corporate and institutional clients. 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.

The Company has two consolidated subsidiaries, WSFS Bank and Cypress, and one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has three wholly-owned subsidiaries, WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC.

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could” or “may”, or by variations of such words or by similar expressions. 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 market areas 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 any problem loans including litigation and other costs; changes in market interest rates may increase funding costs and reduce earning asset yields thus reducing 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 changes in regulations affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations being issued in accordance with this statute and potential expenses associated with complying with such regulations; possible additional loan losses and impairment of the collectability of loans; 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; 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; conditions in the financial markets that may limit the Company’s access to additional funding to meet its liquidity needs; the success of the Company’s growth plans, including the successful integration of past and future acquisitions; the Company’s ability to complete the pending merger with Penn Liberty on the terms and conditions proposed which are subject to a number of conditions, risks and uncertainties delay in closing the merger, difficulties and delays in integrating the Penn Liberty business or fully realizing cost savings and other benefits of the merger, business disruption following the merger, Penn Liberty’s 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 security; 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 acceleration of prepayments of mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on prepayments on mortgage-backed securities due to low interest rates; 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 costs associated with resolving any problem loans, litigation and other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2015 and other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

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CRITICAL ACCOUNTING POLICIES

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, investment in reverse mortgages, 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 2016, it is reasonably 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.

See further discussion of these critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 1, Basis of Presentation, to the unaudited Consolidated Financial Statements.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $100.4 million, or 2%, to $5.68 billion during the three months ended March 31, 2016. Included in this increase was a $54.8 million, or 6%, increase in investment securities as a result of ongoing portfolio management and a $23.0 million, or 1%, increase in net loans. The increase in net loans was primarily the result of an increase in commercial and industrial loans of $40.6 million. Partially offsetting this increase was an $18.5 million decrease in residential mortgages due to our strategy of selling newly originated residential mortgages in the secondary market.

Total liabilities increased $83.2 million, or 2%, to $5.09 billion during the three months ended March 31, 2016. This increase was primarily the result of an increase in total deposits of $52.2 million, or 1%, and an increase in FHLB advances of $38.3 million, or 6%. The increase in total deposits included an $8.9 million increase in customer deposits and a $43.3 million increase in brokered deposits. The increases in brokered deposits and FHLB advances were due to loan growth and ongoing portfolio management. These increases were partially offset by a decrease of $7.9 million, or 15% in other liabilities.

Capital Resources

During the first quarter of 2015, the WSFS Board of Directors declared a three-for-one stock split of our common stock in the form of a stock dividend. On May 4, 2015, stockholders approved an increase in the authorized shares of common stock from 20.0 million to 65.0 million. The stock dividend was paid on May 18, 2015 to stockholders on record as of May 4, 2015.

During the first quarter of 2016, WSFS repurchased 301,871 shares of common stock at an average price of $29.75 as part of our 5% buyback program approved by the Board of Directors during the fourth quarter of 2015. WSFS has 1,098,694 shares, or just under 4% of outstanding shares, remaining to repurchase under this current authorization.

Stockholders’ equity increased $17.1 million between December 31, 2015 and March 31, 2016. This increase was primarily due to net income of $15.8 million during the three months ended March 31, 2016.

Tangible common book value per share of common stock (a non-GAAP financial measure) was $17.04 at March 31, 2016, an increase of $0.74, or 5%, from $16.30 at December 31, 2015. Book value per share of common stock was $20.24 at March 31, 2016, an increase of $0.74, or 4% from $19.50 at December 31, 2015.

 

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Below is a table comparing WSFS Bank’s consolidated capital position to the minimum regulatory requirements as of March 31, 2016:

 

                               To be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
     Consolidated
Bank Capital
    For Capital
Adequacy Purposes
   
(In Thousands)    Amount      % of
Assets
    Amount      % of
Assets
    Amount      % of
Assets
 

Total Capital (to Risk-Weighted Assets)

   $ 616,271        12.96    $ 380,291        8.00    $ 475,364        10.00 

Tier 1 Capital (to Risk-Weighted Assets)

     578,113        12.16       285,218        6.00       380,291        8.00  

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

     578,113        12.16       213,914        4.50       308,987        6.50  

Tier 1 Leverage Capital

     578,113        10.50       220,291        4.00       275,364        5.00  

Under new guidelines issued by banking regulators effective January 1, 2015, savings institutions such as WSFS Bank must maintain a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, a minimum ratio of total capital to risk-weighted assets of 8.0%, and a minimum Tier 1 leverage ratio of 4.0%. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

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 upon 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.

At March 31, 2016, WSFS Bank was in compliance with regulatory capital requirements and all of its regulatory capital ratios exceeded “well-capitalized” regulatory benchmarks. WSFS Bank’s total risk based capital ratio was 12.96%, Tier 1 capital ratio and total common equity tier 1 capital was 12.16%. In addition, and not included in the WSFS Bank capital, WSFS separately held $36.9 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general capital purposes.

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 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.

During the three months ended March 31, 2016, cash and cash equivalents increased $28.8 million to $590.0 million from $561.2 as of December 31, 2015. This increase was primarily the result of a $43.3 million increase in brokered deposits, a $38.3 million increase in FHLB advances, a $8.9 million increase in customer deposits, and a $14.0 million increase in retained earnings due primarily to net income for the three months ended March 31, 2016. This increase was partially offset by a $53.7 million increase in investment securities, available-for-sale, and a $23.0 million increase in net loans.

 

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NONPERFORMING ASSETS

Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure 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:

 

(In Thousands)    March 31,
2016
    December 31,
2015
 

Nonaccruing loans:

  

Commercial

   $ 4,933     $ 5,328  

Owner-occupied commercial

     1,269       1,091  

Consumer

     4,115       4,133  

Commercial mortgages

     2,596       3,326  

Residential mortgages

     6,878       7,287  

Construction

     —         —    
  

 

 

   

 

 

 

Total nonaccruing loans

     19,791       21,165  

Assets acquired through foreclosure

     3,979       5,080  

Troubled debt restructuring (accruing)

     13,909       13,647  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 37,679     $ 39,892  
  

 

 

   

 

 

 

Past due loans: (1)

    

Residential mortgages

   $ —       $ 251  

Consumer

     127       252  

Commercial and commercial mortgages

     —         17,529  
  

 

 

   

 

 

 

Total past due loans

   $ 127     $ 18,032  
  

 

 

   

 

 

 

Ratio of allowance for loan losses to total loans (2)

     0.99      0.98 

Ratio of nonaccruing loans to total loans (2)

     0.52       0.56  

Ratio of nonperforming assets to total assets

     0.66       0.71  

Ratio of loan loss allowance to nonaccruing loans

     189.76       175.27  

Ratio of loan loss allowance to total nonperforming assets

     1.00       0.93  

 

(1) Accruing loans only which includes acquired nonimpaired loans. Nonaccruing TDR’s are included in their respective categories of nonaccruing loans.
(2) Total loans exclude loans held for sale.

Nonperforming assets decreased $2.2 million between December 31, 2015 and March 31, 2016. As a result, nonperforming assets as a percentage of total assets decreased from 0.71% at December 31, 2015 to 0.66% at March 31, 2016. This decrease is due to significant collections and workout activity. One relationship in particular paid down over $600,000. There were eight Real Estate Owned (OREO) properties with a total balance of $1.8 million sold during the first quarter of 2016. However this was offset by $764,000 in new OREO properties. Past due loans decreased $18 million from December 31, 2015 to March 31, 2016 due to successful collection efforts on one large C&I loan.

 

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

 

(In Thousands)    For the Three
Months Ended
March 31, 2016
     For the Year
Ended
December 31, 2015
 

Beginning balance

   $ 39,892      $ 52,385  

Additions

     2,473        12,897  

Collections

     (3,940      (14,167

Transfers to accrual

     —          (95

Charge-offs, net

     (746      (11,128
  

 

 

    

 

 

 

Ending balance

   $ 37,679      $ 39,892  
  

 

 

    

 

 

 

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Problem loans include special mention, sub-standard (performing and nonperforming excluding purchase credit impaired) and 90 days delinquent and still accruing. 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, 2016, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $105.7 million. Our interest-sensitive liabilities as a percentage of interest-sensitive assets within the one-year window decreased from 103.9% at December 31, 2015 to 103.7% at March 31, 2016. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 1.86% at March 31, 2016 from 1.96% at December 31, 2015. 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, required to be performed 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 e