WSFS Financial Corporation
WSFS FINANCIAL CORP (Form: 10-Q, Received: 11/09/2016 16:31:44)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 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  ☒    No  ☐

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 4, 2016.

 

Common Stock, par value $.01 per share

 

31,324,432

(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I. Financial Information  
          Page  

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

     3   
  

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015

     4   
  

Consolidated Statements of Condition as of September 30, 2016 and December 31, 2015

     5   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

     6   
  

Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2016 and 2015

     8   

Item 2.

  

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

     46   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     58   

Item 4.

  

Controls and Procedures

     58   
PART II. Other Information   

Item 1.

  

Legal Proceedings

     59   

Item 1A.

  

Risk Factors

     59   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     59   

Item 3.

  

Defaults upon Senior Securities

     59   

Item 4.

  

Mine Safety Disclosure

     59   

Item 5.

  

Other Information

     59   

Item 6.

  

Exhibits

     59   

Signatures

     60   

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 September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  
     (Unaudited)  
(Dollars in thousands, except per share data)                            

Interest income:

           

Interest and fees on loans

   $ 48,546      $ 38,437      $ 136,568      $ 111,771  

Interest on mortgage-backed securities

     3,854        3,588        11,658        10,544  

Interest and dividends on investment securities:

           

Taxable

     80        56        242        177  

Tax-exempt

     1,134        819        3,418        2,410  

Interest on reverse mortgage loans

     1,303        1,561        3,826        3,963  

Other interest income

     420        396        1,174        1,898  
  

 

 

    

 

 

    

 

 

    

 

 

 
     55,337        44,857        156,886        130,763  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     2,412        1,587        6,734        5,354  

Interest on senior debt

     2,119        942        4,236        2,825  

Interest on Federal Home Loan Bank advances

     1,225        868        3,397        2,332  

Interest on trust preferred borrowings

     415        343        1,183        1,009  

Interest on other borrowings

     145        120        545        339  
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,316        3,860        16,095        11,859  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     49,021        40,997        140,791        118,904  

Provision for loan losses

     5,828        1,453        7,862        6,012  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     43,193        39,544        132,929        112,892  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     7,776        6,486        21,930        18,975  

Wealth management income

     6,074        5,373        17,610        16,173  

Deposit service charges

     4,482        4,338        13,100        12,342  

Mortgage banking activities, net

     2,555        1,251        6,025        4,544  

Securities gains, net

     1,040        76        1,890        1,004  

Loan fee income

     542        405        1,499        1,337  

Bank owned life insurance income

     255        162        697        544  

Other income

     4,125        3,574        12,017        10,299  
  

 

 

    

 

 

    

 

 

    

 

 

 
     26,849        21,665        74,768        65,218  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries, benefits and other compensation

     24,804        20,784        71,189        62,139  

Occupancy expense

     4,335        3,757        12,560        11,272  

Equipment expense

     2,653        2,059        7,642        6,100  

Professional fees

     1,554        2,039        6,891        5,264  

Data processing and operations expenses

     1,500        1,570        4,564        4,451  

Marketing expense

     712        619        2,177        2,210  

Loan workout and OREO expenses

     511        166        1,059        495  

FDIC expenses

     469        786        2,080        2,142  

Corporate development expense

     5,885        855        7,003        2,137  

Other operating expense

     8,074        6,070        22,558        20,062  
  

 

 

    

 

 

    

 

 

    

 

 

 
     50,497        38,705        137,723        116,272  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     19,545        22,504        69,974        61,838  

Income tax provision

     6,823        8,078        24,004        22,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 12,722      $ 14,426      $ 45,970      $ 39,549  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.42      $ 0.52      $ 1.54      $ 1.41  

Diluted

   $ 0.41      $ 0.51      $ 1.50      $ 1.39  

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     Nine Months Ended  
   September 30,     September 30,  
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  
(Dollars in thousands)                         

Net Income

   $ 12,722     $ 14,426     $ 45,970     $ 39,549  

Other comprehensive income (loss):

        

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

        

Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of ($682), $3,787, $8,668 and $2,892, respectively

     (1,112     6,178       14,143       4,721  

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $395, $29, $718 and $381, respectively

     (645     (47     (1,172     (623
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,757     6,131       12,971       4,098  

Net change in securities held-to-maturity

        

Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $60, $55, $187, $175, respectively

     (102     (104     (305     (312

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 ($14), ($9), $266 and ($27), respectively

     (20     (15     436       (45

Net change in cash flow hedge

        

Net unrealized gain arising during the period, net of tax expense of $38, $0, $38, and $0, respectively

     61       —         61       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (1,818     6,012       13,163       3,741  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 10,904     $ 20,438     $ 59,133     $ 43,290  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     September 30,     December 31,  
     2016     2015  
(Dollars in thousands, except share data)    (Unaudited)  

Assets:

    

Cash and due from banks

   $ 119,159     $ 83,065  

Cash in non-owned ATMs

     694,022       477,924  

Interest-bearing deposits in other banks

     224       190  
  

 

 

   

 

 

 

Total cash and cash equivalents

     813,405       561,179  

Investment securities, available for sale

     777,835       721,029  

Investment securities, held to maturity-at cost

     164,880       165,862  

Loans, held for sale at fair value

     61,198       41,807  

Loans, net of allowance for loan losses of $39,028 at September 30, 2016 and $37,089 at December 31, 2015

     4,347,027       3,729,050  

Reverse mortgage loans

     23,120       24,284  

Bank-owned life insurance

     101,185       90,208  

Stock in Federal Home Loan Bank of Pittsburgh-at cost

     36,710       30,519  

Assets acquired through foreclosure

     3,232       5,080  

Accrued interest receivable

     15,257       14,040  

Premises and equipment

     47,094       39,569  

Goodwill

     155,436       85,212  

Intangible assets

     17,273       10,083  

Other assets

     63,941       66,715  
  

 

 

   

 

 

 

Total assets

   $ 6,627,593     $ 5,584,637  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 1,245,127     $ 958,238  

Interest-bearing demand

     967,248       784,619  

Money market

     1,251,315       1,090,050  

Savings

     538,093       439,918  

Time

     329,401       333,000  

Jumbo certificates of deposit – customer

     257,816       254,011  
  

 

 

   

 

 

 

Total customer deposits

     4,589,000       3,859,836  

Brokered deposits

     144,639       156,730  
  

 

 

   

 

 

 

Total deposits

     4,733,639       4,016,566  

Federal funds purchased and securities sold under agreements to repurchase

     81,000       128,200  

Federal Home Loan Bank advances

     817,167       669,514  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     151,914       53,675  

Other borrowed funds

     27,615       14,486  

Accrued interest payable

     3,658       801  

Other liabilities

     53,579       53,913  
  

 

 

   

 

 

 

Total liabilities

     5,935,583       5,004,166  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 65,000,000 shares authorized; issued 55,903,577 at September 30, 2016 and 55,945,245 at December 31, 2015

     580       560  

Capital in excess of par value

     327,148       256,435  

Accumulated other comprehensive income

     13,859       696  

Retained earnings

     611,163       570,630  

Treasury stock at cost, 24,569,145 shares at September 30, 2016 and 26,182,401 shares at December 31, 2015

     (260,740     (247,850
  

 

 

   

 

 

 

Total stockholders’ equity

     692,010       580,471  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,627,593     $ 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

 

     Nine months ended  
   September 30,  
     2016     2015  
     (Unaudited)  
(Dollars in thousands)             

Operating activities:

    

Net Income

   $ 45,970     $ 39,549  

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

    

Provision for loan losses

     7,862       6,012  

Depreciation of premises and equipment, net

     5,587       4,650  

Amortization of fees and discounts, net

     13,921       11,221  

Amortization of intangible assets

     1,260       1,258  

(Increase) decrease in accrued interest receivable

     (239     12  

Decrease (increase) decrease in other assets

     8,028       (253

Origination of loans held-for-sale

     (252,368     (350,584

Proceeds from sales of loans held-for-sale

     230,864       348,760  

Gain on mortgage banking activities, net

     (6,025     (4,544

Gain on sale of securities, net

     (1,890     (1,004

Stock-based compensation expense

     2,253       3,319  

Increase in accrued interest payable

     2,857       756  

(Decrease) increase in other liabilities

     (2,286     1,524  

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

     230        (298

Deferred income tax expense

     5,364       2,418  

Increase in value of bank-owned life insurance

     (2,311     (527

Increase in capitalized interest, net, on reverse mortgage loans

     (3,834     (4,088
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 55,243     $ 58,181  
  

 

 

   

 

 

 

Investing activities:

    

Purchases of investment securities held-to-maturity

     (3,329     (19,195

Repayments of investment securities held-to-maturity

     —         970  

Maturities and calls of investment securities held-to-maturity

     2,840       3,881  

Sale of investment securities available-for-sale

     155,789       117,380  

Purchases of investment securities available-for-sale

     (254,993     (209,947

Repayments of investment securities available-for-sale

     62,798       80,293  

Repayments on reverse mortgages

     6,134       9,559  

Disbursements for reverse mortgages

     (1,136     (649

Net increase in loans

     (146,498     (181,290

Net cash for business combinations

     51,788       —    

Net increase in stock of FHLB

     (6,191     (4,665

Sales of assets acquired through foreclosure, net

     4,069        5,278  

Investment in premises and equipment, net

     (7,677     (4,968
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (136,406   $ (203,353
  

 

 

   

 

 

 

 

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     Nine months ended  
   September 30,  
     2016     2015  
     (Unaudited)  
(Dollars in thousands)             

Financing activities:

    

Net increase in demand and saving deposits

     221,336       76,241  

Decrease in time deposits

     (57,383     (116,863

(Decrease) increase in brokered deposits

     (12,091     36,624  

(Decrease) increase in loan payable

     (366     61  

Receipts from FHLB advances

     90,314,153       46,342,654  

Repayments of FHLB advances

     (90,166,500     (46,105,521

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

     21,676,620       22,843,325  

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

     (21,723,820     (22,855,550

Maturity of repurchase agreement

     —         (25,000

Dividends paid

     (5,437     (4,216

Issuance of common stock and exercise of common stock options

     1,918       2,688  

Issuance of senior debt

     97,849       —    

Purchase of treasury stock

     (12,890     (28,273
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 333,389     $ 166,170  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     252,226       20,998  

Cash and cash equivalents at beginning of period

     561,179       508,039  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 813,405     $ 529,037  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 13,238     $ 11,103  

Cash paid for income taxes, net

     18,640       16,558  

Loans transferred to other real estate owned

     1,455       2,545  

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

     6,337       104  

Net change in accumulated other comprehensive income

     13,163       3,741  

Fair value of assets acquired, net of cash received

     526,767       —    

Fair value of liabilities assumed

     583,517       —    

Non-cash goodwill adjustments, net

     (1,496     136  

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

 

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WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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), Cypress Capital Management, LLC (Cypress) and WSFS Wealth Management, LLC. 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 The Consolidated Financial Statements as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.

 

AICPA: American Institute of Certified Public Accountants

 

Allowance: Allowance for loan losses or ALLL

 

Alliance: Alliance Bancorp Inc. of Pennsylvania

 

Array: Formerly Array Financial Group (WSFS Mortgage)

 

Arrow: Arrow Land Transfer

 

ASC: Accounting standard codification

 

Associate: Employee

 

ASU: Accounting standard update

 

BCBS: Basel Committee on Banking Supervision

 

C&I: Commercial & Industrial (loans)

 

CMO: Collateralized mortgage obligation

 

Cypress: Cypress Capital Management, LLC

 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

 

DTA: Deferred tax asset

 

Exchange Act: Securities Exchange Act of 1934

 

FASB: Financial Accounting Standards Board

 

FDIC: Federal Deposit Insurance Corporation

  

Federal Reserve: Board of Governors of the Federal Reserve System

 

Monarch: Monarch Entity Services, LLC

 

FHLB: Federal Home Loan Bank

 

FHLMC: Federal Home Loan Mortgage Corporation

 

FNMA: Federal National Mortgage Association

 

GAAP: U.S. Generally Accepted Accounting Principles

 

GNMA: Government National Mortgage Association

 

GSE: U.S. Government and government sponsored enterprises

 

HPA: House Price Appreciation

 

IRR: Internal Rate of Return

 

NSFR: Net stable funding ratio

 

MBS: Mortgage-backed securities

 

OCC: Office of the Comptroller of the Currency

 

OREO: Other real estate owned

 

OTTI: Other-than-temporary impairment

 

TDR: Troubled Debt Restructurings

Overview

Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States. We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers. The FDIC insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 76 offices located in Delaware (46), Pennsylvania (28), 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 include the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, reverse mortgage loans, OTTI, and income tax valuation allowance. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform to 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.

Acquisitions

On August 12, 2016 we completed the acquisition of Penn Liberty Financial Corp. (Penn Liberty), a community bank headquartered in Wayne, Pennsylvania. We expect this acquisition to build our market share, deepen our presence in the southeastern Pennsylvania market, and enhance our customer base. The results of Penn Liberty’s operations are included in our Consolidated Financial Statements since the date of the acquisition. See Note 2 – Business Combinations for further information.

Also during the third quarter, we acquired the assets of Powdermill Financial Solutions LLC (Powdermill), a multi-family office serving an affluent clientele in the local community and throughout the United States. This acquisition aligns with our strategic plan to expand our wealth management offerings and to diversify our fee-income generating businesses.

Derivatives and Hedging

During the third quarter of 2016, we implemented a hedging program to manage our interest rate risk. This program did not have a material effect on our statements of condition or results of operations.

 

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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 adopted ASU 2016-09 in the second quarter of 2016 and recognized a $0.7 million tax benefit in the Consolidated Statements of Operations. 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 be 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 was 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 on 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 was 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 was 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.

 

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Accounting Guidance Pending Adoption at September 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. In March 2016, the FASB issued ASU 2016- 08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods 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 is currently evaluating the impact of adopting ASU 2014-9 and associated guidance on its Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Company does not expect the application of this guidance to have a material impact on its Consolidated 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 simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of adopting ASU 2016-02 on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-05: Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships , which amends ASC Topic 815: Derivatives and Hedging. This new guidance clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, caused a hedge accounting relationship to be discontinued because it does not represent a termination of the original derivative instrument or a change in the critical terms of the hedge relationship, This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. Early adoption is permitted, including adoption in an interim period. The Company 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. 2016-06, 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 its Consolidated Statements of Operations or Consolidated Statements of Condition.

 

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In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, Investments - Equity Method and Joint Ventures (Topic 323).   ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The standard is effective for all entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date. The Company 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 is currently evaluating the impact of adopting ASU 2016-8 on its Consolidated Financial Statements.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 represents the Emerging Issues Task Force’s (“the EITF”) final consensus on eight issues related to the classification of cash payments and receipts in the statement of cash flows for a number of common transactions. The consensus also clarifies when identifiable cash flows should be separated versus classified based on their predominant source or use. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

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2. BUSINESS COMBINATIONS

Penn Liberty Financial Corporation

On August 12, 2016, we completed the acquisition of Penn Liberty. Penn Liberty conducted its primary business operations through its subsidiary Penn Liberty Bank, which was merged into WSFS Bank. Upon closing the transaction, Penn Liberty had 11 banking offices in Montgomery and Chester counties, Pennsylvania, which are suburbs of Philadelphia. WSFS acquired Penn Liberty to expand the scale and efficiency of its operations in southeastern Pennsylvania in addition to the opportunity of generating additional revenue by providing its full suite of banking, mortgage banking, wealth management and insurance services to the Penn Liberty markets.

The acquisition of Penn Liberty was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration 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. We are currently evaluating the fair values of replacement equity awards, fixed assets acquired and leases assumed in the transaction. The excess of consideration paid over the preliminary fair value of net assets acquired was recorded as goodwill in the amount of $65.2 million, which is not 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 $2.9 million in core deposit intangibles which are being amortized over ten years using the straight-line depreciation method.

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:

 

(Dollars in thousands)    Fair Value  

Consideration Paid:

  

Common shares issued (1,806,748)

   $ 66,759  

Cash paid to Penn Liberty stock and option holders

     40,549  
  

 

 

 

Value of consideration

     107,308  

Assets acquired:

  

Cash and due from banks

     102,301  

Investment securities

     627  

Loans

     483,482  

Premises and equipment

     7,364  

Deferred income taxes

     6,452  

Bank owned life insurance

     8,666  

Core deposit intangible

     2,882  

Other real estate owned

     996  

Other assets

     10,595  
  

 

 

 

Total assets

     623,365  

Liabilities assumed:

  

Deposits

     568,706  

Other borrowings

     10,000  

Other liabilities

     2,557  
  

 

 

 

Total liabilities

     581,263  

Net assets acquired:

     42,102  
  

 

 

 

Goodwill resulting from acquisition of Penn Liberty

   $ 65,206  
  

 

 

 

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates.

Acquired loans were recorded at their fair value as of the acquisition date. The fair value was based on a discounted cash flow methodology that uses assumptions as to credit risk, default rates, collateral values and loss severity, along with estimated prepayment rates. Non-impaired acquired loans had a gross contractual balance of $491.2 million and a fair value of $470.8 million. Loans that had deteriorated in credit quality since their origination, and for which it was probable that all contractual cash flows would not be received, were accounted for in accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The gross contractual balance of the impaired loans was $15.3 million with a fair value of $12.7 million. For additional information regarding acquired impaired loans, see Note 5 - Loans.

 

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The fair value of savings and transaction deposit accounts acquired was assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity.

Direct costs related to the acquisition were expensed as incurred. During the three months ended September 30, 2016, the Company incurred $5.7 million in integration expenses, including $2.0 million in salary and benefits, $1.1 million in professional fees, $0.9 in data processing expense and $0.8 in marketing expense.

Powdermill Financial Solutions LLC

On August 1, 2016, we acquired the assets of Powdermill, a multi-family office serving an affluent clientele in the local community and throughout the United States. This acquisition aligns with our strategic plan to expand our wealth offerings and diversify our fee-income generating business. The excess of consideration paid over the preliminary fair value of the net assets acquired was recorded as goodwill, which is not amortizable but is deductible for tax purposes. The Company allocated the total balance of goodwill to its Wealth Management segment.

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 excess of consideration paid over the fair value of net assets acquired was recorded as goodwill in the amount of $36.4 million, which will not be amortizable and is not deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. The Company also recorded $2.6 million in core deposit intangibles which are being amortized over ten years using the straight-line depreciation method and $511,000 for non-compete covenants which are being amortized between six and eighteen months.

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

 

(Dollars 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

     3,365  
  

 

 

 

Total assets

     408,181  

Liabilities assumed:

  

Deposits

     341,682  

Other Borrowings

     2,826  

Other liabilities

     681  
  

 

 

 

Total liabilities

     345,189  

Net assets acquired:

     62,992  
  

 

 

 

Goodwill resulting from acquisition of Alliance

   $ 34,929  
  

 

 

 

 

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The following table details the changes to goodwill in 2016:

 

(Dollars 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

     (379

Other liabilities

     (992
  

 

 

 

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

   $ 34,929  
  

 

 

 

The adjustments made to goodwill during the first nine months of 2016 reflect changes in the fair value of deferred federal income taxes, other assets, and other liabilities during the measurement period.

 

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3. EARNINGS PER SHARE

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(Dollars and Shares in thousands, Except Per Share Data)    2016      2015      2016      2015  

Numerator:

           

Net income

   $ 12,722      $ 14,426      $ 45,970      $ 39,549  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average basic shares

     30,520        27,721        29,914        28,035  

Dilutive potential common shares

     797        511        747        468  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average fully diluted shares

     31,317        28,232        30,661        28,503  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.42      $ 0.52      $ 1.54      $ 1.41  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.41      $ 0.51      $ 1.50      $ 1.39  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     1        83        10        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.

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
(Dollars in thousands)    Cost      Gain      Loss      Value  

Available-for-Sale Securities:

           

September 30, 2016

           

GSE

   $ 35,070      $ 66      $ —        $ 35,136  

CMO

     259,379        5,396        34        264,741  

FNMA MBS

     370,292        10,149        150        380,291  

FHLMC MBS

     66,326        1,846        —          68,172  

GNMA MBS

     28,264        646        42        28,868  

Other investments

     627        —          —          627  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 759,958      $ 18,103      $ 226      $ 777,835  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

GSE

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

CMO

     253,189        713        2,414        251,488  

FNMA MBS

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

FHLMC MBS

     99,350        405        313        99,442  

GNMA MBS

     20,387        420        93        20,714  
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
(Dollars in thousands)    Cost      Gain      Loss      Value  

Held-to-Maturity Securities (1)

           

September 30, 2016

           

State and political subdivisions

   $ 164,880      $ 4,713      $ 31      $ 169,562  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

State and political subdivisions

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

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $2.4 million and $2.9 million at September 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 September 30, 2016 and December 31, 2015 are presented in the table below:

 

     Available-for-Sale (1)  
     Amortized      Fair  
(Dollars in thousands)    Cost      Value  

September 30, 2016

     

Within one year

   $ 8,995      $ 9,010  

After one year but within five years

     26,075        26,125  

After five years but within ten years

     281,237        289,917  

After ten years

     443,024        452,156  
  

 

 

    

 

 

 
   $ 759,331      $ 777,208  
  

 

 

    

 

 

 

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  
     Amortized      Fair  
(Dollars in thousands)    Cost      Value  

September 30, 2016

     

Within one year

   $ —        $ —    

After one year but within five years

     5,097        5,180  

After five years but within ten years

     9,030        9,219  

After ten years

     150,753        155,163  
  

 

 

    

 

 

 
   $ 164,880      $ 169,562  
  

 

 

    

 

 

 

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  
  

 

 

    

 

 

 

 

(1) Included in the investment portfolio, but not in the table above, is a mutual fund with an amortized cost and fair value, as of September 30, 2016 of $0.6 million, which has no stated maturity.

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 $598.9 million and $457.0 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of September 30, 2016 and December 31, 2015, respectively.

During the first nine months of 2016 and 2015, we sold $155.8 million and $117.3 million, respectively of investment securities categorized as available-for-sale, for a gain of $1.9 million and $1.0 million, respectively. No losses were incurred from sales during the first nine months of 2016 and 2015.

As of September 30, 2016 and December 31, 2015, our investment securities portfolio had remaining unamortized premiums of $18.5 million and $18.3 million, respectively, and unaccreted discounts of $0.3 million at both September 30, 2016 and December 31, 2015.

 

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Table of Contents

For those investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at September 30, 2016.

 

     Duration of Unrealized Loss Position                
     Less than 12 months      12 months or longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
(Dollars in thousands)    Value      Loss      Value      Loss      Value      Loss  

Available-for-sale securities:

                 

CMO

   $ 7,690      $ 1      $ 5,144      $ 33      $ 12,834      $ 34  

FNMA MBS

     37,371        150        —          —          37,371        150  

GNMA MBS

     9,311        42        —          —          9,311        42  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 54,372      $ 193      $ 5,144      $ 33      $ 59,516      $ 226  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
(Dollars in thousands)    Value      Loss      Value      Loss      Value      Loss  

Held-to-maturity securities:

                 

State and political subdivisions

   $ 3,372      $ 21      $ 708      $ 10      $ 4,080      $ 31  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 3,372      $ 21      $ 708      $ 10      $ 4,080      $ 31  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2015.

 

     Duration of Unrealized Loss Position                
     Less than 12 months      12 months or longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
(Dollars in thousands)    Value      Loss      Value      Loss      Value      Loss  

Available-for-sale securities:

                 

GSE

   $ 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  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
(Dollars in thousands)    Value      Loss      Value      Loss      Value      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 September 30, 2016, we owned investment securities totaling $63.6 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $0.3 million at September 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. 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 September 30, 2016. All securities were evaluated for OTTI at September 30, 2016 and December 31, 2015. The result of this evaluation showed no OTTI as of September 30, 2016 or December 31, 2015. The estimated weighted average duration of MBS was 4.3 years at September 30, 2016.

 

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5. LOANS

The following table shows our loan portfolio by category:

 

     September 30,      December 31,  
(Dollars in thousands)    2016      2015  

Commercial and industrial

   $ 1,266,717      $ 1,061,597  

Owner-occupied commercial

     1,057,645        880,643  

Commercial mortgages

     1,153,903        966,698  

Construction

     208,976        245,773  

Residential

     268,711        259,679  

Consumer

     438,158        360,249  
  

 

 

    

 

 

 
     4,394,110      $ 3,774,639  

Less:

     

Deferred fees, net

     8,055      $ 8,500  

Allowance for loan losses

     39,028        37,089  
  

 

 

    

 

 

 

Net loans

   $ 4,347,027      $ 3,729,050  
  

 

 

    

 

 

 

The following table shows the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the Company applies ASC 310-30 as of the dates indicated:

 

(Dollars in thousands)    September 30, 2016      December 31, 2015  

Outstanding principal balance

   $ 46,892      $ 38,067  

Carrying amount

     37,829        32,658  

Allowance for loan losses

     274        132  

The following table presents the changes in accretable yield on the acquired credit impaired loans for the nine months ended September 30, 2016:

 

(Dollars in thousands)    January 1 through
September 30, 2016
 

Balance at beginning of period

   $ 4,764  

Accretion

     (1,933

Reclassification from nonaccretable difference

     1,086  

Additions/adjustments

     344  

Disposals

     (7
  

 

 

 

Balance at the end of the period

   $ 4,254  
  

 

 

 

 

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6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized. We established our allowance for loan losses in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102) and FASB ASC 450, Contingencies (ASC 450). When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation of the allowance is assigned in accordance with ASC 310-10. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based upon a continuing review of these portfolios. The following are included in our allowance for loan losses:

 

    Specific reserves for impaired loans

 

    An allowance for each pool of homogenous loans based on historical loss experience

 

    Adjustments for qualitative and environmental factors allocated to pools of homogenous loans

When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the nine months ended September 30, 2016, net charge-offs totaled $5.9 million or 0.20% of average loans annualized, compared to $9.0 million, or 0.36% of average loans annualized, during the nine months ended September 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 as follows: 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 23 quarters. During 2016, we increased the look-back period to 23 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 23 quarter look-back period.

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

 

    Current underwriting policies, staff, and portfolio mix,

 

    Internal trends of delinquency, nonaccrual and criticized loans by segment,

 

    Risk rating accuracy, control and regulatory assessments/environment,

 

    General economic conditions - locally and nationally,

 

    Market trends impacting collateral values,

 

    The competitive environment, as it could impact loan structure and underwriting, and

 

    Valuation complexity by segment.

The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves. 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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The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 8 quarters as of September 30, 2016. Our residential mortgage and consumer LEP remained at 4 quarters as of September 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 in prior periods is the 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 nine months ended September 30, 2016:

 

(Dollars in thousands)

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

Three months ended September 30, 2016

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

    (3,737     (1,415     (1     (30     (43     (518     —         (5,744

Recoveries

    223       15       197       440       33       290       —         1,198   

Provision (credit)

    3,714       1,437       1,089       (824     (179     401       —         5,638   

Provision for acquired loans

    117       185       (48     (76     12       —         —         190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,719     $ 6,945     $ 9,372     $ 2,818     $ 2,175     $ 5,999     $ —       $ 39,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2016

               

Allowance for loan losses

  

         

Beginning balance

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

Charge-offs

    (4,643     (1,556     (79     (59     (72     (1,967     —         (8,376

Recoveries

    557       66       310       486       112       922       —         2,453   

Provision (credit)

    4,551       1,564       2,650       (1,104     (177     1,118       (1,010   $ 7,592   

Provision for acquired loans

    98       201       4       (26     31       (38     —         270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,719     $ 6,945     $ 9,372     $ 2,818     $ 2,175     $ 5,999     $ —       $ 39,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 692     $ —       $ 1,264     $ 215     $ 989     $ 201     $ —       $ 3,361   

Loans collectively evaluated for impairment

    10,974       6,923       7,982       2,549       1,167       5,798       —         35,393   

Acquired loans evaluated for impairment

    53       22       126       54       19       —         —         274   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,719     $ 6,945     $ 9,372     $ 2,818     $ 2,175     $ 5,999     $ —       $ 39,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

  $ 4,198     $ 2,510     $ 7,165     $ 1,419     $ 13,957     $ 8,105     $ —       $ 37,354  (2)  

Loans collectively evaluated for impairment

    1,077,258       869,051       904,328       182,338       150,318       368,428       —         3,551,721   

Acquired nonimpaired loans

    175,570       175,411       229,530       21,627       103,537       61,257       —         766,932   

Acquired impaired loans

    9,691       10,673       12,880       3,592       899       368       —         38,103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,266,717     $ 1,057,645     $ 1,153,903     $ 208,976     $ 268,711     $ 438,158     $ —       $ 4,394,110  (3)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

(Dollars in thousands)

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

Three months ended September 30, 2015

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

    (4,147     (26     (804     —         (130     (1,499     —         (6,606

Recoveries

    84       40        14       19       158       405       —         720   

Provision (credit)

    303       (62     231       306       (362     1,086       11       1,513   

Provision for acquired loans

    —         —          (71     104       (92     (1     —         (60
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 10,752     $ 6,685      $ 6,201     $ 3,742     $ 2,283     $ 5,779     $ 970     $ 36,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 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

    (6,184     (623     (808     —         (397     (2,570     —         (10,582

Recoveries

    198       62        83       179       195       839       —         1,556   

Provision (credit)

    3,485       574        (508     863       50       1,460       (550     5,374   

Provision for acquired loans

    416       29        168       104       (88     9       —         638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 10,752     $ 6,685      $ 6,201     $ 3,742     $ 2,283     $ 5,779     $ 970     $ 36,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 993     $ —        $ 241     $ 214     $ 934     $ 202     $ —       $ 2,584   

Loans collectively evaluated for impairment

    9,406       6,657        5,907       3,527       1,348       5,577       970       33,392   

Acquired loans evaluated for impairment

    353       28        53       1       1       —         —         436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 10,752     $ 6,685       6,201     $ 3,742     $ 2,283     $ 5,779     $ 970     $ 36,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances:

               

Loans individually evaluated for impairment

  $ 5,775     $ 1,170      $ 6,805     $ 1,419     $ 14,613     $ 7,749     $ —       $ 37,531 (2)  

Loans collectively evaluated for impairment

    900,660       770,246        836,556       190,925       169,566       327,524       —         3,195,477   

Acquired nonimpaired loans

    28,998       37,937        25,555       8,223       15,137       5,930       —         121,780   

Acquired impaired loans

    2,627       2,195        5,400       2,594       380       7       —         13,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 938,060     $ 811,548      $ 874,316     $ 203,161     $ 199,696     $ 341,210     $ —       $ 3,367,991 (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 $14.2 million and $13.6 million for the periods ending September 30, 2016 and 2015, respectively. Accruing troubled debt restructured loans are considered impaired loans.
(3)   Ending loan balances do not include deferred costs.

Nonaccrual and Past Due Loans

Nonaccruing loans are those on which the accrual of interest has ceased. We discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the accretion of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing are defined as loans contractually past due 90 days or more as to principal or interest payments, but which remain in accrual status because they are considered well secured and are in the process of collection.

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

 

September 30, 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

   $ 354     $ 1,297     $ —       $ 1,651     $ 1,251,430     $ 9,691     $ 3,945     $ 1,266,717  

Owner-occupied commercial

     572       —         —         572       1,043,890       10,673       2,510       1,057,645  

Commercial mortgages

     3,096       6,902       —         9,998       1,123,939       12,880       7,086       1,153,903  

Construction

     —         —         —         —         205,384       3,592       —         208,976  

Residential

     4,867       157       —         5,024       257,308       899       5,480       268,711  

Consumer

     788       135       271       1,194       432,445       368       4,151       438,158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

   $ 9,677     $ 8,491     $ 271     $ 18,439     $ 4,314,396     $ 38,103     $ 23,172     $ 4,394,110  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.22     0.19     0.01     0.42     98.18     0.87     0.53     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   The balances above include $766.9 million of acquired nonimpaired loans.

 

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Table of Contents

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 above include $371.1 million of acquired nonimpaired loans

Impaired Loans

Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and FASB ASC 310, Receivables (ASC 310). The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the fair value of collateral, if the loan is collateral dependent or (3) the loan’s observable market price. If the measure of the impaired loan is less than the recorded investment in the loan, a related allowance is allocated for the impairment.

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

 

     Ending      Loans with      Loans with             Contractual      Average  
September 30, 2016    Loan      No Related      Related      Related      Principal      Loan  

(Dollars in thousands)

   Balances      Reserve (1)      Reserve      Reserve      Balances      Balances  

Commercial

   $ 5,383      $ 1,578      $ 3,805      $ 745      $ 6,616      $ 5,430  

Owner-occupied commercial

     4,153        2,510        1,643        22        4,340        2,827  

Commercial mortgages

     9,152        1,614        7,538        1,390        11,529        5,889  

Construction

     2,524        —          2,524        269        2,625        1,942  

Residential

     14,776        6,967         7,809        1,008        16,994        15,174  

Consumer

     8,105        6,791        1,314        201        9,922        7,856  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

   $ 44,093      $ 19,460      $ 24,633      $ 3,635      $ 52,026      $ 39,118  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Reflects loan balances at or written down to their remaining book balance.
(2)   The above includes acquired impaired loans totaling $6.7 million in the ending loan balance and $7.8 million in the contractual principal balance.

 

December 31, 2015

(Dollars in thousands)

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

Commercial

   $ 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.

 

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Table of Contents

Interest income of $0.5 million and $0.8 million was recognized on impaired loans during the three and nine months ended September 30, 2016, respectively. Interest income of $0.4 million and $1.3 million was recognized on impaired loans during the three and nine months ended September 30, 2015.

As of September 30, 2016, there were 27 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.9 million and $2.0 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 $0.7 million, respectively.

Reserves on Acquired Nonimpaired Loans

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

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.

 

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Table of Contents

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

Commercial Credit Exposure

 

(Dollars in thousands)   Commercial     Owner-Occupied
Commercial
    Commercial
Mortgages
    Construction     Total
Commercial (1)
 
                                                    Sept. 30,
2016
    Dec. 31,
2015
 
    Sept. 30,
2016
    Dec. 31
2015
    Sept. 30,
2016
    Dec. 31
2015
    Sept. 30,
2016
    Dec. 31
2015
    Sept. 30,
2016
    Dec. 31
2015
    Amount     %     Amount     %  

Risk Rating:

                       

Special mention

  $ 16,925     $ 5,620     $ 16,744     $ 9,535     $ 34,368     $ 12,323     $ 188     $ —       $ 68,225       $ 27,478    

Substandard:

                       

Accrual

    28,630       33,883       18,941       22,901       11,170       2,547       2,011       8,296       60,752         67,627    

Nonaccrual

    3,253       4,164       2,510       1,090       5,822       3,326       —         —         11,585         8,580    

Doubtful

    692       1,164       —         —         1,264       —         —         —         1,956         1,164    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special and Substandard

    49,500       44,831       38,195       33,526       52,624       18,196       2,199       8,296       142,518       4     104,849       3

Acquired impaired

    9,691       12,985       10,673       4,688       12,880       10,513       3,592       3,544       36,836       1       31,730       1  

Pass

    1,207,526       1,003,781       1,008,777       842,429       1,088,399       937,989       203,185       233,933       3,507,887       95       3,018,132       96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,266,717     $ 1,061,597     $ 1,057,645     $ 880,643     $ 1,153,903     $ 966,698     $ 208,976     $ 245,773     $ 3,687,241       100   $ 3,154,711       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)   Table includes $602.1 million and $277.0 million of acquired nonimpaired loans as of September 30, 2016 and December 31, 2015, respectively.

Residential and Consumer Credit Exposure

 

(Dollars in thousands)    Residential      Consumer      Total Residential and Consumer (2)  
     Sept. 30,      Dec. 31      Sept. 30,      Dec. 31      Sept. 30, 2016     Dec. 31, 2015  
     2016      2015      2016      2015      Amount      Percent     Amount      Percent  

Nonperforming(1)

   $ 13,957      $ 15,548      $ 8,105      $ 7,664      $ 22,062        3   $ 23,212        4

Acquired impaired loans

     899        950        368        7        1,267        —         957        —    

Performing

     253,855        243,181        429,685        352,578        683,540        97       595,759        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 268,711      $ 259,679      $ 438,158      $ 360,249      $ 706,869        100   $ 619,928        100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1)   Includes $14.2 million as of September 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 $164.8 million and $94.2 million in acquired nonimpaired loans as of September 30, 2016 and December 31, 2015, respectively.

 

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Table of Contents

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 September 30, 2016 and December 31, 2015 was $22.0 million and $24.6 million, respectively. The balance at September 30, 2016 included approximately $7.8 million of TDRs in nonaccrual status and $14.2 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 $1.8 million and $2.1 million in related reserves have been established for these loans at September 30, 2016 and December 31, 2015, respectively.

During the nine months ended September 30, 2016, the terms of 20 loans were modified in TDRs. Twelve modifications were for consumer loans of which ten were HELOC conversions and two loans were discharged in bankruptcy. Six were residential mortgages; three received rate reduction and maturity date extension, 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 nine months ended September 30, 2016 and 2015.

 

(Dollars in thousands)

   Three
Months Ended
September 30,
2016
     Three
Months Ended
September 30,
2015
     Nine
Months Ended
September 30,
2016
     Nine
Months Ended
September 30,
2015
 

Commercial

   $ —        $ —        $ 1,125      $ —    

Owner Occupied Commercial

     —          —          —          577  

Commercial mortgages

     —          —          —          —    

Construction

     —          —          —          —    

Residential

     797        38        1,523        447  

Consumer

     278         643        733         1,306  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,075      $ 681      $ 3,381      $ 2,330  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2016, the TDRs set forth in the table above increased our allowance for loan losses less than $0.1 million, and resulted in charge-offs of less than $0.1 million. For the same period of 2015, the TDRs set forth in the table above increased our allowance for loan losses less than $0.1 million through the allocation of a related reserve and resulted in charge-offs of less than $0.1 million.

 

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Table of Contents

7. REVERSE MORTGAGE LOANS

Reverse mortgage loans are contracts in which a homeowner borrows against the equity in their 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 $23.1 million at September 30, 2016. The portfolio consists of 80 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 $42.1 million exceeds the outstanding book balance at September 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 expected to be 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 September 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 September 30, 2016, the internal rate of return (IRR) of 19.49% 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 expected to be liquidated.

 

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Table of Contents

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

 

(Dollars in thousands)       

Year Ending

      

2016

   $ 266  

2017

     433  

2018

     341  

2019

     265  

2020

     204  

Years 2021 - 2025

     471  

Years 2026 - 2030

     95  

Years 2031 - 2035

     14  

Thereafter

     2  
  

 

 

 

Total (1)

   $ 2,091  
  

 

 

 

 

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

The amount of the contract value that would be forfeited if we were not to make cash payments to reverse mortgagors in the future is $6.4 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 $0.7 million for the quarter ended September 30, 2016 with an IRR of 18.76%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $0.3 million with an IRR of 19.16%.

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 $1.2 million. If the IRR decreased by 1%, the net present value would decrease by $1.2 million.

 

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Table of Contents

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 nine months ended September 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:

 

     WSFS      Cash      Wealth      Consolidated  
(Dollars in thousands)    Bank      Connect      Management      Company  

December 31, 2015

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

Changes in goodwill

     (1,496      —          —          (1,496

Goodwill from business combinations

     65,206        —          6,514        71,720  
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2016

   $ 143,788      $ —        $ 11,648      $ 155,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

ASC 350 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

The following table summarizes other intangible assets:

 

     Gross             Net  
(Dollars in thousands)    Intangible      Accumulated      Intangible  
     Assets      Amortization      Assets  

September 30, 2016

        

Core deposits

   $ 13,128        (5,344    $ 7,784  

Customer relationships

     11,105        (2,511      8,594  

Non-compete agreements

     604        (374      230  

Mortgage servicing rights

     1,518        (1,034      484  

Favorable lease asset

     195        (14      181  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 26,550      $ (9,277    $ 17,273  
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Core deposits

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

Customer relationships

     5,495        (2,028      3,467  

Non-compete agreements

     511        (110      401  

Mortgage servicing rights

     1,430        (949      481  
  

 

 

    

 

 

    

 

 

 

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 nine months ended September 30, 2016, we recognized amortization expense on other intangible assets of $1.3 million.

 

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Table of Contents

The following presents the estimated amortization expense of intangibles:

 

(Dollars in thousands)    Amortization
of Intangibles
 

Remaining in 2016

   $ 641  

2017

     2,295  

2018

     2,132  

2019

     2,063  

2020

     1,868  

Thereafter

     8,274  
  

 

 

 

Total

   $ 17,273  
  

 

 

 

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.

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

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Service cost

   $ 14      $ 15      $ 43      $ 44  

Interest cost

     19        22        57        66  

Prior service cost amortization

     (18      (19      (44      (57

Net gain recognition

     (16      (5      (47      (15
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ (1    $ 13      $ 9      $ 38  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2016. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2013 through 2015 tax years are subject to examination as of September 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, $0.4 million and $1.2 million of such amortization has been reflected as income tax expense for the three and nine months ended September 30, 2016, respectively, compared to $0.5 million and $1.4 million for the same periods in 2015.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the nine months ended September 30, 2016 were $1.2 million, $1.2 million and $0.3 million, respectively. The carrying value of the investment in affordable housing credits is $10.8 million at September 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.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following tables present financial instruments carried at fair value as of September 30, 2016 and December 31, 2015 by level in the valuation hierarchy (as described above):

 

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(Dollars in thousands)

September 30, 2016

   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

   $ —        $ 264,741      $ —        $ 264,741  

FNMA MBS

     —          380,291        —          380,291  

FHLMC MBS

     —          68,172        —          68,172  

GNMA MBS

     —          28,868        —          28,868  

GSE

     —          35,136        —          35,136  

Other investments

     627        —          —          627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 627      $ 777,208      $ —        $ 777,835  

Assets measured at fair value on a nonrecurring basis

  

        

Other real estate owned

   $ —        $ —        $ 3,232      $ 3,232  

Loans held-for-sale

     —          61,198        —          61,198  

Impaired loans, net

     —          —          40,458        40,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —        $ 61,198      $ 43,690      $ 104,888  
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

December 31, 2015

   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 September 30, 2016 and no material liabilities measured at fair value as of September 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 September 30, 2016, securities classified as available-for-sale are reported at fair value using Level 2 inputs, except for one mutual fund asset related to the Penn Liberty acquisition, which is categorized as Level 1. Included in the Level 2 total are approximately $35.1 million in U.S. Treasury Notes and Federal Agency debentures, and $742.1 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 $44.1 million and $37.7 million at September 30, 2016 and December 31, 2015, respectively. The valuation allowance on impaired loans was $3.6 million as of September 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 in “Fair Value of Financial Assets and Liabilities” section above).

Loans

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

Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh

The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.

Other assets

Other assets includes, among others, other real estate owned (see discussion earlier in this note) and our investment in Visa Class B stock. Our ownership includes shares acquired at no cost from our prior participation in Visa’s network, while Visa operated as a cooperative. During 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 September 30, 2016, and the evaluation showed no OTTI as of September 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 $13.3 million as of September 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:

 

(Dollars in thousands)    Fair Value      September 30, 2016      December 31, 2015  
     Measurement      Book Value      Fair Value      Book Value      Fair Value  

Financial assets:

              

Cash and cash equivalents

     Level 1       $ 813,405        813,405      $ 561,179      $ 561,179  

Investment securities available-for-sale

     Level 2         777,835        777,835        721,029        721,029  

Investment securities held-to-maturity

     Level 2         164,880        169,562        165,862        167,743  

Loans, held-for-sale

     Level 2         61,198        61,198        41,807        41,807  

Loans, net (1)

     Level 2         4,306,569        4,283,862        3,693,964        3,637,714  

Impaired loans, net

     Level 3         40,458        40,458        35,086        35,086  

Reverse mortgage loans

     Level 3         23,120        23,120        24,284        24,284  

Stock in FHLB of Pittsburgh

     Level 2         36,710        36,710        30,519        30,519  

Accrued interest receivable

     Level 2         15,257        15,257        14,040        14,040  

Other assets

     Level 3         7,277        16,625        8,669        18,416  

Financial liabilities:

              

Deposits

     Level 2         4,733,639        4,528,014        4,016,566        3,791,606  

Borrowed funds

     Level 2         1,144,707        1,143,498        932,886        933,905  

Standby letters of credit

     Level 3         284        284        195        195  

Accrued interest payable

     Level 2         3,658        3,658        801        801  

 

(1)   Excludes impaired loans, net.

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

 

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12. SEGMENT INFORMATION

As defined in FASB ASC 280, Segment Reporting (ASC 280), an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax ordinary income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying unaudited Consolidated Financial Statements. Based on these criteria, we have identified three segments: WSFS Bank, Cash Connect, and Wealth Management.

The WSFS Bank segment provides financial products to commercial and retail customers. Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS Bank. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Accordingly, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.

Cash Connect provides ATM vault cash and smart safe and cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect.

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through 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 September 30, 2016 and 2015 follows:

 

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     Three months ended September 30, 2016  
(Dollars in thousands)                            
     WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 53,332      $ —        $ 2,005      $ 55,337  

Noninterest income

     11,957        8,632        6,260        26,849  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     65,289        8,632        8,265        82,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,302        —          1,698        3,000  

Noninterest income

     2,140        229        27        2,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     3,442        229        1,725        5,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     68,731        8,861        9,990        87,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     6,113        —          203        6,316  

Noninterest expenses

     40,991        5,006        4,500        50,497  

Provision for loan losses

     5,669        —          159        5,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     52,773        5,006        4,862        62,641  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     1,698        790        512        3,000  

Noninterest expenses

     256        744        1,396        2,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,954        1,534        1,908        5,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     54,727        6,540        6,770        68,037  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 14,004      $ 2,321      $ 3,220      $ 19,545  

Income tax provision

              6,823  
           

 

 

 

Consolidated net income

            $ 12,722  
           

 

 

 

Capital expenditures

   $ 10,900      $ 248      $ 11      $ 11,159  

As of September 30, 2016:

           

Statement of Condition

           

Cash and cash equivalents

   $ 99,298      $ 712,209      $ 1,898      $ 813,405  

Goodwill

     143,788        —          11,648        155,436  

Other segment assets

     5,499,725        2,599        156,428        5,658,752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 5,742,811      $ 714,808      $ 169,974      $ 6,627,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Three months ended September 30, 2015  
(Dollars in thousands)                            
     WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 42,873      $ —        $ 1,984      $ 44,857  

Noninterest income

     8,944        7,138        5,583        21,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     51,817        7,138        7,567        66,522  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     879        —          1,697        2,576  

Noninterest income

     2,028        219        26        2,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,907        219        1,723        4,849  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     54,724        7,357        9,290        71,371  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     3,688        —          172        3,860  

Noninterest expenses

     30,066        4,255        4,384        38,705  

Provision for loan losses

     1,345        —          108        1,453  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     35,099        4,255        4,664        44,018  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,697        394        485        2,576  

Noninterest expenses

     245        624        1,404        2,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,942        1,018        1,889        4,849  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     37,041        5,273        6,553        48,867  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 17,683      $ 2,084      $ 2,737      $ 22,504  

Income tax provision

              8,078  
           

 

 

 

Consolidated net income

              14,426  
           

 

 

 

Capital expenditures (1)

   $ 1,663      $ 429      $ 5      $ 2,097  

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 September 30, 2015. Previously reported capital expenditures were $3.5 million for WSFS Bank, $1.5 million for Cash Connect, $0.1 million for Wealth Management, and $5.0 million for Total Consolidated Company.

 

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Segment information for the nine months ended September 30, 2016 and 2015 follows:

 

     Nine months ended September 30, 2016  
(Dollars in thousands)                            
     WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 150,862      $ —        $ 6,024      $ 156,886  

Noninterest income

     31,982        24,443        18,343        74,768  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     182,844        24,443        24,367        231,654  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     3,498        —          5,245        8,743  

Noninterest income

     6,211        632        76        6,919  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     9,709        632        5,321        15,662