WSFS Financial Corporation
WSFS FINANCIAL CORP (Form: 10-Q, Received: 08/09/2016 17:09:37)
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 June 30, 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 August 5, 2016.

 

Common Stock, par value $.01 per share   29,550,150
(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 and Six Months Ended June 30, 2016 and 2015      3   
  

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015

     4   
   Consolidated Statements of Condition as of June 30, 2016 and December 31, 2015      5   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015      6   
  

Notes to the Consolidated Financial Statements for the Three and Six Months Ended June 30, 2016 and 2015

     8   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      44   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      56   
Item 4.    Controls and Procedures      56   
PART II. Other Information   
Item 1.    Legal Proceedings      57   
Item 1A.    Risk Factors      57   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      57   
Item 3.    Defaults upon Senior Securities      57   
Item 4.    Mine Safety Disclosure      57   
Item 5.    Other Information      57   
Item 6.    Exhibits      57   
Signatures         58   
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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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  
    

(Unaudited)

 
     (In Thousands, Except Per Share Data)  

Interest income:

           

Interest and fees on loans

   $ 44,505      $ 37,090      $ 88,022      $ 73,334  

Interest on mortgage-backed securities

     3,910        3,523        7,804        6,956  

Interest and dividends on investment securities:

           

Taxable

     85        60        162        121  

Tax-exempt

     1,141        792        2,284        1,591  

Interest on reverse mortgage loans

     1,478        1,166        2,523        2,402  

Other interest income

     384        424        754        1,502  
  

 

 

    

 

 

    

 

 

    

 

 

 
     51,503        43,055        101,549        85,906  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     2,204        1,825        4,322        3,767  

Interest on Federal Home Loan Bank advances

     1,124        751        2,172        1,464  

Interest on trust preferred borrowings

     397        339        768        666  

Interest on senior debt

     1,175        941        2,117        1,883  

Interest on other borrowings

     189        109        400        219  
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,089        3,965        9,779        7,999  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     46,414        39,090        91,770        77,907  

Provision for loan losses

     1,254        3,773        2,034        4,559  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     45,160        35,317        89,736        73,348  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     7,253        6,462        14,154        12,489  

Deposit service charges

     4,342        4,099        8,618        8,004  

Wealth management income

     6,282        5,707        11,536        10,800  

Mortgage banking activities, net

     1,816        1,590        3,470        3,293  

Securities gains, net

     545        477        850        928  

Loan fee income

     480        469        957        932  

Bank owned life insurance income

     211        179        442        382  

Other income

     3,920        3,475        7,892        6,725  
  

 

 

    

 

 

    

 

 

    

 

 

 
     24,849        22,458        47,919        43,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries, benefits and other compensation

     23,509        20,345        46,385        41,355  

Occupancy expense

     3,955        3,637        8,225        7,515  

Equipment expense

     2,516        1,959        4,989        4,041  

Data processing and operations expenses

     1,522        1,459        3,064        2,881  

Professional fees

     2,934        1,753        5,337        3,225  

FDIC expenses

     773        687        1,611        1,356  

Loan workout and OREO expenses

     45        330        548        329  

Marketing expense

     801        1,007        1,465        1,591  

Corporate development expense

     549        686        1,118        1,282  

Other operating expense

     7,423        6,791        14,484        13,992  
  

 

 

    

 

 

    

 

 

    

 

 

 
     44,027        38,654        87,226        77,567  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     25,982        19,121        50,429        39,334  

Income tax provision

     8,504        6,887        17,181        14,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 17,478      $ 12,234      $ 33,248      $ 25,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.59      $ 0.43      $ 1.12      $ 0.89  

Diluted

   $ 0.58      $ 0.43      $ 1.10      $ 0.88  

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
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  
     (In Thousands)     (In Thousands)  

Net Income

   $ 17,478     $ 12,234     $ 33,248     $ 25,123  

Other comprehensive income (loss):

        

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

        

Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $2,870, $(3,692), $9,350 and ($893), respectively

     4,683       (6,024     15,255       (1,457

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $207, $181, $323 and $352, respectively

     (338     (296     (527     (576
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,345       (6,320     14,728       (2,033

Net change in securities held-to-maturity

        

Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax ( benefit) of $62, $120, $127, $120, respectively

     (100     (37     (203     (208

Net change in unfunded pension liability

        

Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($13), ($9), $280 and ($18), respectively

     (22     (15     456       (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     4,223       (6,372     14,981       (2,271
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 21,701     $ 5,862     $ 48,229     $ 22,852  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     June 30,
2016
    December 31,
2015
 
(In Thousands, Except Per Share Data)    (Unaudited)  

Assets:

    

Cash and due from banks

   $ 104,507     $ 83,065  

Cash in non-owned ATMs

     599,114       477,924  

Interest-bearing deposits in other banks

     272       190  
  

 

 

   

 

 

 

Total cash and cash equivalents

     703,893       561,179  

Investment securities, available-for-sale

     766,459       721,029  

Investment securities, held-to-maturity at cost

     166,398       165,862  

Loans held-for-sale at fair value

     32,625       41,807  

Loans, net of allowance for loan losses of $37,746 at June 30, 2016 and $37,089 at December 31, 2015

     3,801,240       3,729,050  

Reverse mortgage loans

     25,263       24,284  

Bank-owned life insurance

     91,491       90,208  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     37,939       30,519  

Assets acquired through foreclosure

     2,935       5,080  

Accrued interest receivable

     14,164       14,040  

Premises and equipment

     39,810       39,569  

Goodwill

     84,852       85,212  

Intangible assets

     9,221       10,083  

Other assets

     57,817       66,715  
  

 

 

   

 

 

 

Total assets

   $ 5,834,107     $ 5,584,637  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 977,154     $ 958,238  

Interest-bearing demand

     796,294       784,619  

Money market

     1,091,305       1,090,050  

Savings

     427,843       439,918  

Time

     308,626       333,000  

Jumbo certificates of deposit – customer

     231,791       254,011  
  

 

 

   

 

 

 

Total customer deposits

     3,833,013       3,859,836  

Brokered deposits

     159,126       156,730  
  

 

 

   

 

 

 

Total deposits

     3,992,139       4,016,566  

Federal funds purchased and securities sold under agreements to repurchase

     51,000       128,200  

Federal Home Loan Bank advances

     886,767       669,514  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     152,249       53,675  

Other borrowed funds

     11,775       14,486  

Accrued interest payable

     2,073       801  

Other liabilities

     53,897       53,913  
  

 

 

   

 

 

 

Total liabilities

     5,216,911       5,004,166  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,090,521 at June 30, 2016 and 55,945,245 at December 31, 2015

     562       560  

Capital in excess of par value

     259,519       256,435  

Accumulated other comprehensive income

     15,677       696  

Retained earnings

     600,322       570,630  

Treasury stock at cost, 26,541,772 shares at June 30, 2016 and 26,182,401 shares at December 31, 2015

     (258,884     (247,850
  

 

 

   

 

 

 

Total stockholders’ equity

     617,196       580,471  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,834,107     $ 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

 

     Six months ended
June 30,
 
     2016     2015  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 33,248     $ 25,123  

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

    

Provision for loan losses

     2,034       4,559  

Depreciation of premises and equipment, net

     3,699       3,054  

Amortization of fees and discounts, net

     8,239       7,173  

Amortization of intangible assets

     1,015       787  

Increase in accrued interest receivable

     (124     (490

(Increase) decrease in other assets

     (2,440     271  

Origination of loans held-for-sale

     (152,484     (185,543

Proceeds from sales of loans held-for-sale

     160,686       168,397  

Gain on mortgage banking activities, net

     (3,470     (3,293

Gain on sale of securities, net

     (850     (928

Stock-based compensation expense

     1,480       2,345  

Increase in accrued interest payable

     1,272       875  

(Increase) decrease in other liabilities

     (473     1,582  

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

     162       201  

Deferred income tax expense

     3,821       1,836  

Increase in value of bank-owned life insurance

     (1,283     (430

Increase in capitalized interest, net, on reverse mortgage loans

     (2,688     (2,405
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 51,844     $ 23,114  
  

 

 

   

 

 

 

Investing activities:

    

Purchases of investment securities held-to-maturity

     (3,329     —    

Maturities and calls of investment securities held-to-maturity

     1,810       3,486  

Sale of investment securities available-for-sale

     101,348       84,529  

Purchases of investment securities available-for-sale

     (159,684     (185,463

Repayments of investment securities available-for-sale

     35,570       55,084  

Repayments on reverse mortgages

     2,696       6,196  

Disbursements for reverse mortgages

     (987     (438

Net increase in loans

     (76,288     (149,214

Net (increase) decrease in stock of FHLB

     (7,420     (8,554

Sales of assets acquired through foreclosure, net

     2,657       3,081  

Investment in premises and equipment, net

     (3,870     (2,884
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (107,497   $ (194,177
  

 

 

   

 

 

 

 

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Table of Contents
     Six months ended
June 30,
 
     2016     2015  
     (Unaudited)  
     (In Thousands)  

Financing activities:

    

Net increase (decrease) in demand and saving deposits

     17,446       (38,091

Decrease in time deposits

     (46,594     (77,906

Increase (decrease) in brokered deposits

     2,396       (3,336

(Decrease) increase in loan payable

     (386     41  

Receipts from FHLB advances

     57,591,203       14,455,050  

Repayments of FHLB advances

     (57,373,950     (14,435,200

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

     16,434,870       30,479,478  

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

     (16,512,070     (30,169,691

Dividends paid

     (3,556     (2,823

Issuance of common stock and exercise of common stock options

     1,723       1,845   

Issuance of Senior Debt

     98,319       —    

Purchase of treasury stock

     (11,034     (12,652
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 198,367     $ 196,715  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     142,714        25,652  

Cash and cash equivalents at beginning of period

     561,179       508,039  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 703,893     $ 533,691  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 8,507     $ 7,124  

Cash paid for income taxes, net

     12,493       10,471  

Loans transferred to other real estate owned

     674       2,452  

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

     3,670       171  

Net change in accumulated other comprehensive income

     14,981       (2,271

Non-cash goodwill adjustments, net

     (360     336  

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

 

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WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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

   FASB: Financial Accounting Standards Board
   
Accountants    FDIC: Federal Deposit Insurance Corporation
   
Allowance: Allowance for loan losses or ALLL    Federal Reserve: Board of Governors of the Federal
   
Alliance: Alliance Bancorp Inc. of Pennsylvania    Reserve System
   
Array: Formerly Array Financial Group (WSFS Mortgage)    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
   
C&I: Commercial & Industrial (loans)    enterprises
   
CMO: Collateralized mortgage obligation    NSFR: Net stable funding ratio
   
Cypress: Cypress Capital Management, LLC    MBS: Mortgage-backed securities
   
Dodd-Frank Act: Dodd-Frank Wall Street Reform    OCC: Office of the Comptroller of the Currency
   
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.

Senior Unsecured Debt

On June 13, 2016, the Company issued $100 million of senior unsecured fixed-to-floating rate notes. The senior unsecured notes mature on June 15, 2026 and have a fixed coupon rate of 4.50% from issuance until June 15, 2021 and a variable coupon rate of three-month LIBOR plus 3.30% from June 15, 2021 until maturity. The senior unsecured notes may be redeemed beginning on June 15, 2021 at 100% of principal plus accrued and unpaid interest. The proceeds will be used for general corporate purposes.

 

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RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2016

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 if 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 early adopted ASU 2016-09 during the three months ended June 30, 2016. As a result of the adoption, the Company recognized a $688,000 tax benefit in the Consolidated Statements of Operations for the three and six months ended June 30, 2016. In addition, the Company presented excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method. The Company also made an accounting policy election to account for forfeitures as they occur. This policy election did not have a material impact on the Company’s consolidated financial statements. Adoption of all other changes did not have an impact on our consolidated financial statements.

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 is effective for interim and annual reporting periods beginning after December 15, 2015. 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.

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. 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 June 30, 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.

 

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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.

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.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments —Credit Losses (Topic 326). ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company’s management is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

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 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 The Nasdaq Global Select Market. 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.

 

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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

     7,669  

Bank owned life insurance

     12,923  

Core deposit intangible

     2,635  

Other real estate owned

     768  

Other assets

     3,641  
  

 

 

 

Total assets

     408,457  

Liabilities assumed:

  

Deposits

     341,682  

Other Borrowings

     2,826  

Other liabilities

     2,093  
  

 

 

 

Total liabilities

     346,601  

Net assets acquired:

     61,856  
  

 

 

 

Goodwill resulting from acquisition of Alliance

   $ 36,065  
  

 

 

 

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

     (125

Other assets

     (655

Other liabilities

     420  
  

 

 

 

Adjusted goodwill resulting from the acquisition of Alliance as of June 30, 2016

   $ 36,065  
  

 

 

 

The adjustments made to goodwill during the first six 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.

 

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3. EARNINGS PER SHARE

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In Thousands, Except Per Share Data)    2016      2015      2016      2015  

Numerator:

           

Net income

   $ 17,478      $ 12,234      $ 33,248      $ 25,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average basic shares

     29,545        28,171        29,608        28,194  

Dilutive potential common shares

     606        433        582        443  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average fully diluted shares

     30,151        28,604        30,190        28,637  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.59      $ 0.43      $ 1.12      $ 0.89  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.58      $ 0.43      $ 1.10      $ 0.88  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     5        184        20        184  

 

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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.

 

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

Available-for-Sale Securities:

           

June 30, 2016

           

GSE

   $ 39,080      $ 147      $ —        $ 39,227  

CMO

     259,834        6,520        32        266,322  

FNMA MBS

     336,103        11,144        23        347,224  

FHLMC MBS

     84,550        2,343        —          86,893  

GNMA MBS

     26,181        641        29        26,793  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 745,748      $ 20,795      $ 84      $ 766,459  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

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

Held-to-Maturity Securities (a)

           

June 30, 2016

           

State and political subdivisions

   $ 166,398      $ 6,654      $ 20      $ 173,032  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $2.6 million and $2.9 million at June 30, 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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The scheduled maturities of investment securities available-for-sale and held-to-maturity at June 30, 2016 and December 31, 2015 are presented in the table below:

 

     Available-for-Sale  

(In Thousands)

   Amortized
Cost
     Fair
Value
 

June 30, 2016

     

Within one year

   $ 10,994      $ 11,009  

After one year but within five years

     28,086        28,218   

After five years but within ten years

     239,335        248,220   

After ten years

     467,333        479,012   
  

 

 

    

 

 

 
   $ 745,748      $ 766,459  
  

 

 

    

 

 

 

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
 

June 30, 2016

     

After one year but within five years

     3,179        3,212  

After five years but within ten years

     9,520        9,796  

After ten years

     153,699        160,024  
  

 

 

    

 

 

 
   $ 166,398      $ 173,032  
  

 

 

    

 

 

 

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 $447.2 million and $457.0 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of June 30, 2016 and December 31, 2015, respectively.

During the first six months of 2016 and 2015, we sold $101.3 million and $88.2 million of investment securities categorized as available-for-sale, for a gain of $850,000 and $928,000, respectively. No losses were incurred from sales during the first six months of 2016 and 2015.

As of June 30, 2016 and December 31, 2015, our investment securities portfolio had remaining unamortized premiums of $18.0 million and $18.3 million and unaccreted discounts of $304,000 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 June 30, 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:

                 

CMO

     4,992         15         5,383         17         10,375         32   

FNMA MBS

     4,119        23         —           —           4,119         23   

GNMA MBS

     8,539        29         —           —           8,539         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $  17,650      $ 67      $ 5,383      $ 17      $  23,033      $ 84  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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

   $ —         $ —        $ 2,449      $ 20      $ 2,449      $ 20  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ —         $ —        $ 2,449      $ 20      $ 2,449      $ 20  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2016, we owned investment securities totaling $25.5 million in which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $104,000 at June 30, 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.

All securities, with the exception of one, were AA-rated or better at the time of purchase and remained investment grade at June 30, 2016. All securities were evaluated for OTTI at June 30, 2016 and December 31, 2015. The result of this evaluation showed no OTTI as of June 30, 2016 or December 31, 2015. The estimated weighted average duration of MBS was 3.6 years at June 30, 2016.

 

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5. LOANS

The following details our loan portfolio by category:

 

     June 30,
2016
     December 31,
2015
 
(In Thousands)              

Commercial and industrial

   $ 1,108,610      $ 1,061,597  

Owner occupied commercial

     938,330        880,643  

Commercial mortgages

     990,245        966,698  

Construction

     199,039        245,773  

Residential

     236,657        259,679  

Consumer

     374,634        360,249  
  

 

 

    

 

 

 
   $ 3,847,515      $ 3,774,639  

Less:

     

Deferred fees, net

   $ 8,529      $ 8,500  

Allowance for loan losses

     37,746        37,089  
  

 

 

    

 

 

 

Net loans

   $ 3,801,240      $ 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)    June 30, 2016      December 31, 2015  

Outstanding principal balance

   $ 31,773        38,067  

Carrying amount

     26,777        32,658  

Allowance for loan losses

     295        132  

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

 

(In Thousands)    January 1 through
June 30, 2016
 

Balance at beginning of period

   $ 4,764  

Accretion

     (1,228

Reclassification from nonaccretable difference

     1,090  

Additions/adjustments

     (283

Disposals

     (7
  

 

 

 

Balance at the end of the period

   $ 4,336  
  

 

 

 

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.

 

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Table of Contents

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 six months ended June 30, 2016, net charge-offs totaled $1.3 million or 0.07% of average loans, compared to $3.1 million, or 0.19% of average loans annualized, during the six months ended June 30, 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 22 quarters. During the six months ended June 30 2016, we increased the look-back period to 22 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 22 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

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.

 

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Table of Contents

The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be 8 quarters as of June 30, 2016. Further, our residential mortgage and consumer LEP remained at 4 quarters as of June 30, 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 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 qualitative estimates of valuation factors quarterly and management uses its judgement to make adjustments based on current trends. During the second quarter of 2016 as a result of continued improvement in the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance of loan losses.

Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.

The following tables provide the activity of our allowance for loan losses and loan balances for three and six months ended June 30, 2016:

 

          Owner-
Occupied
Commercial
    Commercial
Mortgages
                      Complexity
Risk (1)
       

(In Thousands)

  Commercial         Construction     Residential     Consumer       Total  

Three months ended June 30, 2016

               

Allowance for loan losses

               

Beginning balance

  $ 11,482     $ 6,702     $ 6,516     $ 3,609     $ 2,269     $ 5,954     $ 1,024     $ 37,556  

Charge-offs

    (727     (141     (61     (3     (15     (818     —         (1,765

Recoveries

    224       13       34       —         57       373       —         701  

Provision (credit)

    353       133       1,598       (352     22       317       (1,024     1,047  

Provision for acquired loans

    70       16       48       54       19       —         —         207  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,402     $ 6,723     $ 8,135     $ 3,308     $ 2,352     $ 5,826     $ —       $ 37,746  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2016

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

    (906     (141     (78     (29     (29     (1,449     —         (2,632

Recoveries

    334       51       113       46       79       632       —         1,255  

Provision (credit)

    837       127       1,561       (280     2       717       (1,010   $ 1,954  

Provision for acquired loans

    (19     16       52       50       19       (38     —         80  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,402     $ 6,723     $ 8,135     $ 3,308     $ 2,352     $ 5,826     $ —       $ 37,746  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 426     $ —       $ —       $ 211     $ 992     $ 205     $ —       $ 1,834  

Loans collectively evaluated for impairment

    10,923       6,686       8,009       3,038       1,340       5,621       —         35,617  

Acquired loans evaluated for impairment

    53       37       126       59       20       —         —         295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,402     $ 6,723     $ 8,135     $ 3,308     $ 2,352     $ 5,826     $ —       $ 37,746  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

  $ 2,558     $ 838     $ 1,702     $ 1,419     $ 14,416     $ 7,965     $ —       $ 28,898  (2)  

Loans collectively evaluated for impairment

    1,045,918       857,270        869,771        181,440       153,811       352,675       —         3,460,885  

Acquired nonimpaired loans

    58,423       70,465        108,212       12,086       67,484       13,990       —         330,660  

Acquired impaired loans

    1,711       9,757       10,560       4,094       946       4       —         27,072  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,108,610     $ 938,330     $ 990,245     $ 199,039     $ 236,657     $ 374,634     $ —       $ 3,847,515  (3)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               

 

20


Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three and six months ended June 30, 2015:

 

          Owner
Occupied
Commercial
    Commercial
Mortgages
                      Complexity
Risk (1)
       

(In Thousands)

  Commercial         Construction     Residential     Consumer       Total  

Three months ended June 30, 2015

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

    (1,903     (272     —         —         (147     (620     —         (2,942

Recoveries

    91       18       28       111       26       233       —         507  

Provision (credit)

    2,788       (80     50       249       448       149       (579     3,025  

Provision for acquired loans

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733     $ 6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 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

    (2,037     (597     (4     —         (267     (1,071     —         (3,976

Recoveries

    114       22       69       160       37       434       —         836  

Provision (credit)

    3,110       637       (729     556       414       384       (561     3,811  

Provision for acquired loans

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733     $ 6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 4,819     $ 75     $ 177     $ 214     $ 1,178     $ 188     $ —       $ 6,651  

Loans collectively evaluated for impairment

    9,205       6,630       6,425       3,098       1,529       5,600       959       33,446  

Acquired loans evaluated for impairment

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733       6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

  $ 9,938     $ 1,389     $ 7,329     $ 1,419     $ 15,198     $ 6,055     $ —       $ 41,328 (2)  

Loans collectively evaluated for impairment

    893,774       750,514       827,381       188,251       181,169       316,213       —         3,157,302  

Acquired nonimpaired loans

    29,894       39,132       29,558       8,696       15,970       6,608       —         129,858  

Acquired impaired loans

    3,159       2,027       5,884       3,479       460       8       —         15,017  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 936,765     $ 793,062     $ 870,152     $ 201,845     $ 212,797     $ 328,884     $ —       $ 3,343,505 (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 $14.1 million and $13.6 million for the periods ending June 30, 2016 and 2015, respectively. Accruing troubled debt restructured loans are considered impaired loans.
(3)   Ending loan balances do not include deferred costs.

 

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Table of Contents

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.

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

 

June 30, 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

   $ 720     $ 132     $ 85     $ 937     $  1,103,908     $ 1,711     $ 2,054     $  1,108,610  

Owner-occupied commercial

     —         —         —         —         927,735       9,757       838       938,330  

Commercial mortgages

     2,424       5,643       —         8,067       969,996       10,560       1,622       990,245  

Construction

     —         —         —         —         194,945       4,094       —         199,039  

Residential

     4,598       533       416       5,547       224,341       946       5,823       236,657  

Consumer

     734       224       219       1,177       369,209       4       4,244       374,634  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

   $ 8,476      $ 6,532      $ 720      $ 15,728      $ 3,790,134      $ 27,072      $ 14,581      $ 3,847,515  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.22     0.17     0.02     0.41     98.51     0.70     0.38     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The balances of above include $330.7 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.

 

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Table of Contents

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.

The following tables provide an analysis of our impaired loans at June 30, 2016 and December 31, 2015:

 

June 30, 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

   $ 3,765      $ 1,565      $ 2,200      $ 479      $ 4,567      $ 6,472  

Owner-occupied commercial

     3,483         486         2,997         37         3,833         2,459  

Commercial mortgages

     3,765         1,703         2,062         126         6,271         5,903   

Construction

     2,856         —           2,856         270         2,979         1,736   

Residential

     15,254         7,823         7,431         1,012         17,768         15,316   

Consumer

     7,965         6,785         1,180         205         9,714         7,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

   $  37,088      $  18,362      $  18,726      $  2,129      $  45,132      $  39,332  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Reflects loan balances at or written down to their remaining book balance.
(2)   The above includes acquired impaired loans totaling $8.2 million in the ending loan balance and $9.4 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 $180,000, and $336,000 was recognized on impaired loans during the three and six months ended June 30, 2016, respectively. Interest income of $449,000, and $921,000 was recognized on impaired loans during the three and six months ended June 30, 2015.

As of June 30, 2016, there were 32 residential loans and 9 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $5.2 million and $1.9 million, 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.

 

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Credit Quality Indicators

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

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

Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.

Substandard. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. 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.

 

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Commercial Credit Exposure

 

                Owner-Occupied     Commercial           Total  
(In Thousands)   Commercial     Commercial     Mortgages     Construction     Commercial (1)  
    June 30,
2016
    Dec. 31 2015     June 30,
2016
    Dec. 31
2015
    June 30,
2016
    Dec. 31
2015
    June 30,
2016
    Dec. 31
2015
    June 30,
2016
    Dec. 31,
2015
 
                    Amount     %     Amount     %  

Risk Rating:

                       

Special mention

  $ 4,379     $ 5,620     $ 6,427     $ 9,535     $ 21,185     $ 12,323     $ —       $ —       $ 31,991       $ 27,478    

Substandard:

                       

Accrual

    40,140       33,883       23,351       22,901       9,868       2,547       —         8,296       73,359         67,627    

Nonaccrual

    1,627       4,164       838       1,090       1,622       3,326       —         —         4,087         8,580    

Doubtful

    427       1,164       —         —         —         —         —         —         427         1,164    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special and Substandard

    46,573       44,831       30,616       33,526       32,675       18,196       —         8,296       109,864       %       104,849      

Acquired impaired

    1,711       12,985       9,757       4,688       10,560       10,513       4,094       3,544       26,122       1       31,730       1  

Pass

    1,060,326       1,003,781       897,957       842,429       947,010       937,989       194,945       233,933       3,100,238       96       3,018,132       96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,108,610     $ 1,061,597     $ 938,330     $ 880,643     $ 990,245     $ 966,698     $ 199,039     $ 245,773     $ 3,236,224       100 %     $ 3,154,711       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)   Table includes $249.2 million and $277.0 million of acquired nonimpaired loans as of June 30, 2016 and December 31, 2015, respectively.

Residential and Consumer Credit Exposure

 

(In Thousands)    Residential      Consumer      Total Residential and Consumer (2)  
     June 30,
2016
     Dec. 31
2015
     June 30,
2016
     Dec. 31
2015
     30-Jun-16     Dec. 31, 2015  
                 Amount      Percent     Amount      Percent  

Nonperforming(1)

   $ 14,416      $ 15,548      $ 7,965      $ 7,664      $ 22,381        4   $ 23,212        4

Acquired impaired loans

     946        950        4        7        950        —         957        —    

Performing

     221,295        243,181        366,665        352,578        587,960        96       595,759        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 236,657      $ 259,679      $ 374,634      $ 360,249      $ 611,291        100   $ 619,928        100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1)   Includes $14.1 million as of June 30, 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 $81.5 million and $94.2 million in acquired nonimpaired loans as of June 30, 2016 and December 31, 2015, respectively.

 

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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 June 30, 2016 and December 31, 2015 was $22.0 million and $24.6 million, respectively. The balance at June 30, 2016 included approximately $7.9 million of TDRs in nonaccrual status and $14.1 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 $1.5 million and $2.1 million in related reserves have been established for these loans at June 30, 2016 and December 31, 2015, respectively.

During the six months ended June 30, 2016, the terms of 14 loans were modified in TDRs. Nine modifications were for consumer loans of which eight were HELOC conversions with interest rate reductions and one loan was discharged in bankruptcy. Three were residential mortgages, two received forbearance agreements and one residential mortgage was discharged in bankruptcy. One commercial loan in bankruptcy was granted interest only payments and one commercial loan was granted a maturity date extension. 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 and six months ended June 30, 2016 and 2015.

 

(In Thousands)

   Three
Months Ended
June 30, 2016
     Three
Months Ended
June 30, 2015
     Six
Months Ended
June 30, 2016
     Six
Months Ended
June 30, 2015
 

Commercial

   $ 141      $ 557      $ 1,125      $ 557  

Owner Occupied Commercial

     —          —          —          —    

Commercial mortgages

     —          —          —          —    

Construction

     —          —          —          —    

Residential

     112        197        726        409  

Consumer

     240        528        455        663  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 493      $ 1,282      $ 2,306      $ 1,629  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 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, the TDRs set forth in the table above increased our allowance $13,000 through the allocation of a related reserve and resulted in charge-offs of $69,000.

 

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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 $25.3 million at June 30, 2016. The portfolio consists of 88 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 $45.5 million exceeds the outstanding book balance at June 30, 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 June 30, 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 June 30, 2016, the internal rate of return (IRR) of 19.62% 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.

As of June 30, 2016, the Company’s actuarially estimated cash payments to reverse mortgagors are as follows:

 

(In thousands)       

Year Ending

      

2016

   $ 398  

2017

     420  

2018

     331  

2019

     258  

2020

     200  

Years 2021 - 2025

     462  

Years 2026 - 2030

     94  

Years 2031 - 2035

     14  

Thereafter

     2  
  

 

 

 

Total (1)

   $ 2,179  
  

 

 

 

 

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

 

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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 $5.9 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 $741,000 for the second quarter ended June 30, 2016 with an IRR of 18.81%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $339,000 with an IRR of 19.25%.

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 $1,102,000. If the IRR decreased by 1%, the net present value would decrease by $1,068,000.

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 six months ended June 30, 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

     (360      —          —          (360
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2016

   $ 79,718      $ —        $ 5,134      $ 84,852  
  

 

 

    

 

 

    

 

 

    

 

 

 

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
 

June 30, 2016

        

Core deposits

   $  10,245      $ (5,067    $ 5,178  

CB&T intangibles

     3,142        (1,279      1,863  

Array and Arrow intangibles

     2,353        (1,022      1,331  

Mortgage servicing rights

     1,508        (1,013      495  

Alliance intangible assets

     650        (296      354  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 17,898      $ (8,677    $ 9,221  
  

 

 

    

 

 

    

 

 

 

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 six months ended June 30, 2016, we recognized amortization expense on other intangible assets of $1.0 million.

The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2016

   $ 922  

2017

     1,577  

2018

     1,440  

2019

     1,372  

2020

     1,048  

Thereafter

     2,862  
  

 

 

 

Total

   $ 9,221  
  

 

 

 

9. ASSOCIATE BENEFIT PLANS

Postretirement Benefits

We share certain costs of providing health and life insurance benefits to eligible retired Associates and their eligible dependents. Previously, all Associates were eligible for these benefits if they reached normal retirement age while working for us. Effective March 31, 2014, we changed the eligibility of this plan to include only those Associates who have achieved ten years of service with us as of March 31, 2014. As of December 31, 2014, we began to use the mortality table issued by the Office of the Actuary of the United States Bureau of Census in October 2014 in our calculation.

We account for our obligations under the provisions of FASB ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that 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.

 

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Table of Contents

The following are disclosures of the net periodic benefit cost components of postretirement benefits measured at January 1, 2016 and 2015.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
(In Thousands)    2016      2015      2016      2015  

Service cost

   $ 14      $ 14      $ 29      $ 29  

Interest cost

     19        22        38        44  

Prior service cost amortization

     (19      (19      (26      (38

Net gain recognition

     (16      (5      (31      (10
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ (2    $ 12      $ 10      $ 25  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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 June 30, 2016. Pennsylvania is currently auditing our 2012 and 2013 state tax returns. 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 and $780,000 of such amortization has been reflected as income tax expense for the three and six months ended June 30, 2016, respectively, compared to $477,000 and $971,000 for the same periods in 2015.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the six months ended June 30, 2016 were $713,000, $780,000 and $189,000, respectively. The carrying value of the investment in affordable housing credits is $11.2 million at June 30, 2016, compared to $12.0 million at December 31, 2015.

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.

 

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Table of Contents

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 June 30, 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

   $ —         $  266,322      $ —         $ 266,322  

FNMA MBS

     —           347,224         —           347,224  

FHLMC MBS

     —           86,893         —           86,893  

GNMA MBS

     —           26,793         —           26,793  

GSE

     —           39,227         —           39,227  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $  766,459      $ —         $ 766,459  

Assets measured at fair value on a nonrecurring basis

           

Other real estate owned

   $ —         $ —         $ 2,935      $ 2,935  

Loans held-for-sale

     —           32,625        —           32,625  

Impaired loans, net

     —          —          34,959        34,959  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —        $ 32,625      $ 37,894      $ 70,519  

(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 June 30, 2016 and no material liabilities measured at fair value as of June 30, 2016 and December 31, 2015.

 

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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 June 30, 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 $727.2 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.

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 $37.1 million and $37.7 million at June 30, 2016 and December 31, 2015, respectively. The valuation allowance on impaired loans was $2.1 million as of June 30, 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.

 

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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.

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 and 2016 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 June 30, 2016, and the evaluation showed no OTTI as of June 30, 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 $11.8 million as of June 30, 2016.

 

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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:

 

(In Thousands)    Fair Value      June 30, 2016      December 31, 2015  
     Measurement      Book Value      Fair Value      Book Value      Fair Value  

Financial assets:

              

Cash and cash equivalents

     Level 1       $ 703,893      $ 703,893      $ 561,179      $ 561,179  

Investment securities available-for-sale

     Level 2         766,459        766,459        721,029        721,029  

Investment securities held-to-maturity

     Level 2         166,398        173,032        165,862        167,743  

Loans, held-for-sale

     Level 2         32,625        32,625        41,807        41,807  

Loans, net (1)

     Level 2         3,766,281        3,752,905        3,693,964        3,637,714  

Impaired loans, net

     Level 3         34,959        34,959        35,086        35,086  

Reverse mortgage loans

     Level 3         25,263        25,263        24,284        24,284  

Stock in FHLB of Pittsburgh

     Level 2         37,939        37,939        30,519        30,519  

Accrued interest receivable

     Level 2         14,164        14,164        14,040        14,040  

Other assets

     Level 3         7,455         15,268         8,669        18,416  

Financial liabilities:

              

Deposits

     Level 2         3,992,139        3,842,770        4,016,566        3,791,606  

Borrowed funds

     Level 2         1,168,802        1,172,972        932,886        933,905  

Standby letters of credit

     Level 3         264        264        195        195  

Accrued interest payable

     Level 2         2,073        2,073        801        801  

 

(1)   Excludes impaired loans, net.

At June 30, 2016 and December 31, 2015 we had no commitments to extend credit measured at fair value.

 

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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.

Segment information for the three months ended June 30, 2016 and 2015 follows:

 

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For the three months ended June 30, 2016:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 49,492      $ —        $ 2,011      $ 51,503  

Noninterest income

     10,173        8,138        6,538        24,849  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     59,665        8,138        8,549        76,352  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,135        —          1,652        2,787  

Noninterest income

     2,011        210        25        2,246  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     3,146        210        1,677        5,033  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     62,811        8,348        10,226        81,385  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     4,896        —          193        5,089  

Noninterest expenses

     34,462        4,831        4,734        44,027  

Provision for loan losses

     1,191        —          63        1,254  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     40,549        4,831        4,990        50,370  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     1,652        628        507        2,787  

Noninterest expenses

     235        727        1,284        2,246  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,887        1,355        1,791        5,033  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     42,436        6,186        6,781        55,403  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 20,375      $ 2,162      $ 3,445      $ 25,982  

Income tax provision

              8,504  
           

 

 

 

Consolidated net income

            $ 17,478  
           

 

 

 

Capital expenditures

   $ 2,235      $ 404      $ 6      $ 2,645  

As of June 30, 2016:

           

Statement of Condition

           

Cash and cash equivalents

   $ 84,919       $ 617,339      $ 1,635      $ 703,893   

Goodwill

     79,718        —          5,134        84,852  

Other segment assets

     4,843,166         3,419        198,777        5,045,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 5,007,803      $ 620,758      $ 205,546      $ 5,834,107  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the three months ended June 30, 2015:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 41,043      $ —        $ 2,012      $ 43,055  

Noninterest income

     9,482        7,068        5,908        22,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     50,525        7,068        7,920        65,513  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     876        —          1,638        2,514  

Noninterest income

     1,998        214        29        2,241  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,874        214        1,667        4,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     53,399        7,282        9,587        70,268  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     3,822        —          143        3,965  

Noninterest expenses

     29,921        4,350        4,383        38,654  

Provision for loan losses

     3,610        —          163        3,773  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     37,353        4,350        4,689        46,392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,638        389        487        2,514  

Noninterest expenses

     243        644        1,354        2,241  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,881        1,033        1,841        4,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     39,234        5,383        6,530        51,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 14,165      $ 1,899      $ 3,057      $ 19,121  

Income tax provision

              6,887  
           

 

 

 

Consolidated net income

              12,234  
           

 

 

 

Capital expenditures (1)

   $ 1,083      $ 987      $ 12      $ 2,082  

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

     4,745,670         —          192,576        4,938,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,891,411       $ 493,165      $ 200,061      $ 5,584,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Capital expenditures amounts have been adjusted to correct errors that were not material to our Form 10-Q for the quarterly period ended June 30, 2015. Previously reported capital expenditures were $299,000 for WSFS Bank, $2,570,000 for Cash Connect, $13,000 for Wealth Management, and $2,882,000 for Total Consolidated Company.

 

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Segment information for the six months ended June 30, 2016 and 2015 follows:

For the six months ended June 30, 2016:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 97,530      $ —        $ 4,019      $ 101,549  

Noninterest income

     20,025        15,811        12,083        47,919  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     117,555        15,811        16,102        149,468  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     2,196        —          3,547        5,743  

Noninterest income

     4,071        403        49        4,523  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     6,267        403        3,596        10,266  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     123,822        16,214        19,698        159,734  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     9,393        —          386        9,779  

Noninterest expenses

     68,274        9,681        9,271        87,226  

Provision for loan losses

     2,006        —          28        2,034  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     79,673        9,681        9,685        99,039  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     3,547        1,183        1,013        5,743  

Noninterest expenses

     452        1,442        2,629        4,523  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     3,999        2,625        3,642        10,266  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     83,672        12,306        13,327        109,305  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 40,150      $ 3,908      $ 6,371      $ 50,429  

Income tax provision

              17,181  
           

 

 

 

Consolidated net income

            $ 33,248  
           

 

 

 

Capital expenditures

   $ 3,446      $ 424      $ 8      $ 3,878  

As of June 30, 2016:

           

Statement of Condition

           

Cash and cash equivalents

   $ 84,919       $ 617,339      $ 1,635      $ 703,893   

Goodwill

     79,718        —          5,134        84,852  

Other segment assets

     4,843,166         3,419        198,777        5,045,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 5,007,803      $ 620,758      $ 205,546      $ 5,834,107  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the six months ended June 30, 2015:

 

(In Thousands)

   WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 81,866      $ —        $ 4,040      $ 85,906  

Noninterest income

     18,671        13,707        11,175        43,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     100,537        13,707        15,215        129,459  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,747        —          3,085        4,832  

Noninterest income

     3,782        382        47        4,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,529        382        3,132        9,043  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     106,066        14,089