WSFS Financial Corporation
WSFS FINANCIAL CORP (Form: 10-Q, Received: 05/09/2017 17:26:24)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
___________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35638
___________________________________________________________________________________
WSFS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________
Delaware
 
22-2866913
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
WSFS Bank Center, 500 Delaware Avenue, Wilmington, Delaware 19801
(Address of principal executive offices)
 
(302) 792-6000
Registrant’s telephone number, including area code:
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
Non-accelerated filer
 
☐  (Do not check if smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
The Registrant had 31,452,055 shares of common stock, par value $0.01 per share, outstanding at May 5, 2017 .
 


Table of Contents

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

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

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Table of Contents

regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its shareholders;
the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
the effects of other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2016 and other documents filed by the Company with the Securities and Exchange Commission from time to time. 
Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as required by law.



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Table of Contents

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

 
$
44,562

Interest on mortgage-backed securities
 
4,395

 
3,894

Interest and dividends on investment securities:
 
 
 
 
Taxable
 
117

 
77

Tax-exempt
 
1,132

 
1,143

Other interest income
 
501

 
370

 
 
60,826

 
50,046

Interest expense:
 
 
 
 
Interest on deposits
 
3,075

 
2,118

Interest on senior debt
 
2,121

 
942

Interest on Federal Home Loan Bank advances
 
1,858

 
1,048

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

 
182

Interest on trust preferred borrowings
 
446

 
371

Interest on other borrowings
 
22

 
29

 
 
7,723

 
4,690

Net interest income
 
53,103

 
45,356

Provision for loan losses
 
2,162

 
780

Net interest income after provision for loan losses
 
50,941

 
44,576

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

 
6,901

Investment management and fiduciary income
 
8,039

 
5,254

Deposit service charges
 
4,397

 
4,276

Mortgage banking activities, net
 
1,185

 
1,654

Securities gains, net
 
320

 
305

Loan fee income
 
549

 
477

Bank owned life insurance income
 
275

 
231

Other income
 
5,196

 
4,570

 
 
28,092

 
23,668

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

 
22,876

Occupancy expense
 
5,162

 
4,270

Equipment expense
 
3,124

 
2,473

Professional fees
 
1,635

 
2,403

Data processing and operations expenses
 
1,618

 
1,542

Marketing expense
 
624

 
664

Loan workout and OREO expenses
 
521

 
503

FDIC expenses
 
529

 
838

Corporate development expense
 
338

 
569

Other operating expense
 
9,119

 
7,659

 
 
51,506

 
43,797

Income before taxes
 
27,527

 
24,447

Income tax provision
 
8,590

 
8,677

Net income
 
$
18,937

 
$
15,770

Earnings per share:
 
 
 
 
Basic
 
$
0.60

 
$
0.53

Diluted
 
$
0.59

 
$
0.52

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


5


WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Net Income
 
$
18,937

 
$
15,770

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

 
10,572

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

 
10,383

Net change in securities held to maturity
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $59 and $65, respectively
 
(101
)
 
(103
)
Net change in unfunded pension liability
 
 
 
 
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($12) and $306, respectively
 
(23
)
 
478

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

Total other comprehensive income
 
830

 
10,758

Total comprehensive income
 
$
19,767

 
$
26,528

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

6


WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands, except per share and share data)
 
(Unaudited)
Assets:
 
 
 
 
Cash and due from banks
 
$
120,913

 
$
119,929

Cash in non-owned ATMs
 
730,747

 
698,454

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

 
3,540

Total cash and cash equivalents
 
855,263

 
821,923

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

 
794,543

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

 
164,346

Loans, held for sale at fair value
 
29,394

 
54,782

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

 
4,444,375

Bank owned life insurance
 
101,700

 
101,425

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

 
38,248

Other real estate owned
 
3,582

 
3,591

Accrued interest receivable
 
16,712

 
17,027

Premises and equipment
 
49,194

 
48,871

Goodwill
 
165,960

 
167,539

Intangible assets
 
24,412

 
23,708

Other assets
 
81,793

 
84,892

Total assets
 
$
6,852,899

 
$
6,765,270

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

 
$
1,266,306

Interest-bearing demand
 
932,284

 
935,333

Money market
 
1,342,464

 
1,257,520

Savings
 
597,186

 
547,293

Time
 
321,325

 
332,624

Jumbo certificates of deposit – customer
 
248,861

 
260,560

Total customer deposits
 
5,100,231

 
4,599,636

Brokered deposits
 
276,599

 
138,802

Total deposits
 
5,376,830

 
4,738,438

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

 
130,000

Federal Home Loan Bank advances
 
298,095

 
854,236

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
152,177

 
152,050

Other borrowed funds
 
48,566

 
64,150

Accrued interest payable
 
2,931

 
1,151

Other liabilities
 
68,288

 
70,898

Total liabilities
 
6,148,898

 
6,077,934

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

 
580

Capital in excess of par value
 
331,371

 
329,457

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

 
627,078

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

 
687,336

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

 
$
6,765,270

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

7


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

 
$
560

 
$
256,435

 
$
696

 
$
570,630

 
$
(247,850
)
 
$
580,471

Net Income
 

 

 

 

 
15,770

 

 
15,770

Other comprehensive income
 

 

 

 
10,758

 

 

 
10,758

Cash dividend, $0.06 per share
 

 

 

 

 
(1,783
)
 

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

 
1

 
659

 

 

 

 
660

Stock-based compensation expense
 

 

 
699

 

 

 

 
699

Repurchase of common stock, 301,871 shares
 

 

 

 

 

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

 
$
561

 
$
257,793

 
$
11,454

 
$
584,617

 
$
(256,845
)
 
$
597,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
55,995,219

 
$
580

 
$
329,457

 
$
(7,617
)
 
$
627,078

 
$
(262,162
)
 
$
687,336

Net Income
 

 

 

 

 
18,937

 

 
18,937

Other comprehensive income
 

 

 

 
830

 

 

 
830

Cash dividend, $0.07 per share
 

 

 

 

 
(2,199
)
 

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

 
1

 
1,093

 

 

 

 
1,094

Stock-based compensation expense
 

 

 
821

 

 

 

 
821

Repurchase of common stock, 62,000 shares
 

 

 

 

 

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

 
$
581

 
$
331,371

 
$
(6,787
)
 
$
643,816

 
$
(264,980
)
 
$
704,001


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



8


WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Three months ended March 31,
 
 
2017
 
2016
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net Income
 
$
18,937

 
$
15,770

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

 
780

Depreciation of premises and equipment, net
 
2,190

 
1,903

Amortization of fees and discounts, net
 
4,742

 
3,895

Amortization of intangible assets
 
857

 
549

Decrease in accrued interest receivable
 
315

 
48

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

 
77,834

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

 
758

Increase in accrued interest payable
 
1,780

 
539

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

 
76

Deferred income tax expense
 
3,190

 
3,293

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

 
$
18,124

Investing activities:
 
 
 
 
Purchases of investment securities held to maturity
 

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

 
1,335

Maturities and calls of investment securities held to maturity
 

 
400

Sale of investment securities available for sale
 
263,015

 
38,932

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

 
15,463

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

 
19,845

Sales of other real estate owned
 
1,707

 
1,442

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

9


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

 
35,907

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

 
43,353

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

 
28,349,212

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

 
8,710,770

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

 
241

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

 
$
79,881

Increase in cash and cash equivalents
 
33,340

 
28,849

Cash and cash equivalents at beginning of period
 
821,923

 
561,179

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

 
$
590,028

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

 
$
4,151

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

Loans transferred to other real estate owned
 
1,737

 
417

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

 
1,510

Net change in accumulated other comprehensive income
 
830

 
10,758

Non-cash goodwill adjustments, net
 
(1,579
)
 
(358
)
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

10


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

11


In 2012, we issued and sold $55.0 million in aggregate principal amount of 6.25% senior notes due 2019 (the “2012 senior debt”). The 2012 senior debt is unsecured and ranks equally with all of our other present and future unsecured unsubordinated obligations. The 2012 senior debt is effectively subordinated to our secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries. At our option, the 2012 senior debt is callable, in whole or in part, on September 1, 2017, or on any scheduled interest payment date thereafter, at a price equal to the outstanding principal amount to be redeemed plus accrued and unpaid interest. The 2012 senior debt matures on September 1, 2019.
Acquisitions in 2016
On August 12, 2016, we completed the acquisition of Penn Liberty Financial Corp. (Penn Liberty), a community bank headquartered in Wayne, Pennsylvania. We expect this acquisition to build our market share, deepen our presence in the southeastern Pennsylvania market, and enhance our customer base. The results of Penn Liberty’s operations are included in our Consolidated Financial Statements since the date of the acquisition. See Note 2 – Business Combinations for further information.
During the third and fourth quarters of 2016, respectively, we acquired the assets of Powdermill Financial Solutions LLC, a multi-family office serving an affluent clientele in the local community and throughout the U.S., and West Capital Management, Inc., an independent, fee-only wealth management firm providing fully customized solutions tailored to the unique needs of institutions and high net worth individuals which operates under a multi-family office philosophy. These acquisitions align with our strategic plan to expand our wealth management offerings and to diversify our fee-income generating businesses.
Correction of Prior Period Balances
The Consolidated Statements of Income for the quarter ended March 31, 2016 has been revised to correct an immaterial error in Noninterest income - Other revenue and Noninterest expense - Other operating expense related to revenue earned for cash servicing fees. As a result, the Consolidated Statement of Income has been revised to reflect these changes, as follows:
 
 
Three months ended March 31, 2016
 
 
As originally reported
 
Adjustments
 
As revised
Noninterest income - Other revenue
 
$
3,972

 
$
598

 
$
4,570

Noninterest expense - Other operating expense
 
7,061

 
598

 
7,659

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

RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2017
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-05: Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships , which amends Accounting Standards Codification (ASC) Topic 815: Derivatives and Hedging. This new guidance clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, cause a hedge accounting relationship to be discontinued because it does not represent a termination of the original derivative instrument or a change in the critical terms of the hedge relationship. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. Early adoption is permitted, including adoption in an interim period. The Company adopted this accounting guidance during the quarter ended March 31, 2017 with no impact to our Consolidated Financial statements, as the standard is applied on a prospective basis.

12


In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, Derivatives and Hedging (Topic 815).  ASU 2016-06 clarifies that determining whether the economic characteristics of a put or call are clearly and closely related to its debt host requires only an assessment of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-24. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. The standard is effective for public business entities in interim and annual periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim period for which the entity’s financial statements have not been issued, but would be retroactively applied to the beginning of the year that includes the interim period. The standard requires a modified retrospective transition approach, with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. For instruments that are eligible for the fair value option, an entity has a one-time option to irrevocably elect to measure the debt instrument affected by the standard in its entirety at fair value with changes in fair value recognized in earnings. The Company adopted this accounting guidance during the quarter ended March 31, 2017 with no impact on our Consolidated Statements of Income or Consolidated Statements of Financial Condition.
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, Investments - Equity Method and Joint Ventures (Topic 323).  ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The standard is effective for all entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date. The Company adopted this accounting guidance during the quarter ended March 31, 2017 with no impact to our Consolidated Financial statements, as the standard is applied on a prospective basis.
Accounting Guidance Pending Adoption at March 31, 2017

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016- 08, Principal versus Agent Considerations (Reporting Gross versus Net) , which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers and 2016-12, Narrow-Scope Improvements and Practical Expedients , both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for public business entities in annual and interim reporting periods in fiscal years beginning after December 15, 2017. Early application is permitted for all entities, but not before annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Company is currently in the process of evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on the Company’s Consolidated Financial Statements. Our preliminary evaluation suggests that adoption of this guidance is not expected to have a material effect on our Consolidated Financial Statements. The Company anticipates completing our assessment in the second half of 2017.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of adopting ASU 2016-02 on its Consolidated Financial Statements.
 

13


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

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

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . ASU 2017-04 simplifies the measurement of goodwill impairment by removing the hypothetical purchase price allocation (“Step 2”). The new guidance requires an impairment of goodwill be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, up to the amount of goodwill recorded. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

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

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

14


In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities . The new guidance requires the amortization period for certain non-contingent callable debt securities held at a premium to end at the earliest call date of the debt security. If the call option is not exercised at the earliest call date, the guidance requires the debt security's effective yield to be reset based on the contractual payment terms of the debt security. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Use of the modified retrospective method, with a cumulative-effect adjustment to retained earnings, is required. In the period of adoption, a change in accounting principle disclosure is required. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
2. BUSINESS COMBINATIONS
Penn Liberty Financial Corporation
On August 12, 2016, we completed the acquisition of Penn Liberty. The acquisition of Penn Liberty was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The fair values are preliminary estimates and are subject to adjustment during the one-year measurement period after the acquisition.
In connection with the merger, the consideration transferred and the fair value of identifiable assets acquired and liabilities assumed, including remeasurement adjustments subsequent to the date of acquisition, are summarized in the following table:
 
(Dollars in thousands)
Fair Value
Consideration Transferred:
 
Common shares issued (1,806,748)
$
68,352

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

Value of consideration
108,901

Assets acquired:
 
Cash and due from banks
102,301

Investment securities
627

Loans
483,482

Premises and equipment
6,817

Deferred income taxes
6,542

Bank owned life insurance
8,666

Core deposit intangible
2,882

Other real estate owned
996

Other assets
12,092

Total assets
624,405

Liabilities assumed:
 
Deposits
568,706

Other borrowings
10,000

Other liabilities
3,977

Total liabilities
582,683

Net assets acquired:
41,722

Goodwill resulting from acquisition of Penn Liberty
$
67,179


15


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

Effects of adjustments to:
 
 
Deferred income taxes
 
880

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

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates.
3. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
 
 
 
Three Months Ended March 31,
(Dollars and Shares in thousands, except per share data)
 
2017
 
2016
Numerator:
 
 
 
 
Net income
 
$
18,937

 
$
15,770

Denominator:
 
 
 
 
Weighted average basic shares
 
31,407

 
29,671

Dilutive potential common shares
 
942

 
558

Weighted average fully diluted shares
 
32,349

 
30,229

Earnings per share:
 
 
 
 
Basic
 
$
0.60

 
$
0.53

Diluted
 
$
0.59

 
$
0.52

Outstanding common stock equivalents having no dilutive effect
 
22

 
42



16


4. INVESTMENT SECURITIES
The following tables detail the amortized cost and the estimated fair value of our available-for-sale and held-to-maturity investment securities. None of our investment securities are classified as trading.
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
GSE
 
$
33,051

 
$
2

 
$
72

 
$
32,981

CMO
 
280,576

 
699

 
3,564

 
277,711

FNMA MBS
 
393,356

 
984

 
8,289

 
386,051

FHLMC MBS
 
65,228

 
204

 
1,261

 
64,171

GNMA MBS
 
27,767

 
275

 
445

 
27,597

Other investments
 
634

 

 
20

 
614

 
 
$
800,612

 
$
2,164

 
$
13,651

 
$
789,125

December 31, 2016
 
 
 
 
 
 
 
 
GSE
 
$
35,061

 
$
9

 
$
60

 
$
35,010

CMO
 
264,607

 
566

 
3,957

 
261,216

FNMA MBS
 
414,218

 
950

 
9,404

 
405,764

FHLMC MBS
 
64,709

 
135

 
1,330

 
63,514

GNMA MBS
 
28,540

 
303

 
427

 
28,416

Other investments
 
626

 

 
3

 
623

 
 
$
807,761

 
$
1,963

 
$
15,181

 
$
794,543

(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Held-to-Maturity Securities (1)
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
163,611

 
$
646

 
$
1,016

 
$
163,241

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

 
$
271

 
$
1,385

 
$
163,232

(1)  
Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $2.1 million and $2.2 million at March 31, 2017 and December 31, 2016 , respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.


17


The scheduled maturities of investment securities available for sale and held to maturity at March 31, 2017 and December 31, 2016 are presented in the table below:
 
 
 
Available for Sale (1) (2)
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2017
 
 
 
 
Within one year
 
$
20,012

 
$
19,997

After one year but within five years
 
18,059

 
17,981

After five years but within ten years
 
210,595

 
205,242

After ten years
 
551,312

 
545,291

 
 
$
799,978

 
$
788,511

December 31, 2016
 
 
 
 
Within one year
 
$
16,009

 
$
16,017

After one year but within five years
 
19,052

 
18,992

After five years but within ten years
 
276,635

 
270,300

After ten years
 
495,439

 
488,611

 
 
$
807,135

 
$
793,920

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

 
$

After one year but within five years
 
5,940

 
5,975

After five years but within ten years
 
10,482

 
10,511

After ten years
 
147,189

 
146,755

 
 
$
163,611

 
$
163,241

December 31, 2016
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
6,168

 
6,162

After five years but within ten years
 
8,882

 
8,870

After ten years
 
149,296

 
148,200

 
 
$
164,346

 
$
163,232

 (1) Included in the investment portfolio, but not in the table above, is a mutual fund with an amortized cost and fair value of $0.6 million as of March 31, 2017 and December 31, 2016 which has no stated maturity.
(2)  
Actual maturities could differ
Mortgage-backed securities (MBS) have expected maturities that differ from their contractual maturities. These differences arise because borrowers have the right to call or prepay obligations with or without a prepayment penalty.
Investment securities with fair market values aggregating $615.8 million and $562.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2017 and December 31, 2016 , respectively.
During the first three months of 2017 , we sold $263.0 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and one security with an immaterial realized loss. During the first three months of 2016, we sold $38.9 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and no realized losses. The cost basis of all investment securities sales is based on the specific identification method.
As of March 31, 2017 and December 31, 2016 , our investment securities portfolio had remaining unamortized premiums of $16.3 million and $18.0 million , respectively, and unaccreted discounts of $0.6 million and $0.4 million , respectively.

18


For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at March 31, 2017 .
 
 
 
Duration of Unrealized Loss Position
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
GSE
 
$
25,981

 
$
72

 
$

 
$

 
$
25,981

 
$
72

CMO
 
161,225

 
3,469

 
4,239

 
95

 
165,464

 
3,564

FNMA MBS
 
276,175

 
8,289

 

 

 
276,175

 
8,289

FHLMC MBS
 
41,765

 
1,261

 

 

 
41,765

 
1,261

GNMA MBS
 
16,236

 
445

 

 

 
16,236

 
445

Other investments
 
634

 
20

 

 

 
634

 
20

Total temporarily impaired investments
 
522,016

 
13,556

 
4,239

 
95

 
526,255

 
13,651

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
84,121

 
$
969

 
$
1,960

 
$
47

 
$
86,081

 
$
1,016

Total temporarily impaired investments
 
$
84,121

 
$
969

 
$
1,960

 
$
47

 
$
86,081

 
$
1,016

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

 
$
60

 
$

 
$

 
$
21,996

 
$
60

CMO
 
160,572

 
3,867

 
4,654

 
90

 
165,226

 
3,957

FNMA MBS
 
50,878

 
1,330

 

 

 
50,878

 
1,330

FHLMC MBS
 
300,403

 
9,404

 

 

 
300,403

 
9,404

GNMA MBS
 
16,480

 
427

 

 

 
16,480

 
427

Other investments
 
623

 
3

 

 

 
623

 
3

Total temporarily impaired investments
 
$
550,952

 
$
15,091

 
$
4,654

 
$
90

 
$
555,606

 
$
15,181

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

 
$
1,374

 
$
695

 
$
11

 
$
113,337

 
$
1,385

Total temporarily impaired investments
 
$
112,642

 
$
1,374

 
$
695

 
$
11

 
$
113,337

 
$
1,385


19


At March 31, 2017 , we owned investment securities totaling $612.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $14.7 million at March 31, 2017 . The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Our investment portfolio is reviewed each quarter for indications of OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.
All securities, with the exception of one having a fair value of $1.0 million at March 31, 2017 , were AA-rated or better at the time of purchase and remained investment grade at March 31, 2017 . All securities were evaluated for OTTI at March 31, 2017 and December 31, 2016 . The result of this evaluation showed no OTTI as of March 31, 2017 or December 31, 2016 . The estimated weighted average duration of MBS was 5.34 years at March 31, 2017 .

20


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

 
$
1,287,731

Owner-occupied commercial
 
1,092,292

 
1,078,162

Commercial mortgages
 
1,165,556

 
1,163,554

Construction
 
255,760

 
222,712

Residential (1)
 
281,760

 
289,611

Consumer
 
464,898

 
450,029

 
 
4,600,133

 
4,491,799

Less:
 
 
 
 
Deferred fees, net
 
8,156

 
7,673

Allowance for loan losses
 
39,826

 
39,751

Net loans
 
$
4,552,151

 
$
4,444,375

(1) Includes Reverse Mortgages, at fair value of $22.5 million at March 31, 2017 and $22.6 million at December 31, 2016 .
The following table shows the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the Company applies ASC 310-30 as of the dates indicated:
 
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Outstanding principal balance
 
$
38,418

 
$
41,574

Carrying amount
 
30,783

 
33,104

Allowance for loan losses
 
464

 
510

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

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

 
 
$
4,102

 

21


6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION
Allowance for Loan Losses
We maintain an allowance for loan losses which represents our best estimate of probable losses within our loan portfolio. As losses are realized, they are charged to this allowance. We established our allowance in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102), Selected Loan Loss Allowance Methodology and Documentation Issues, Accounting Standard Codification ("ASC") Contingencies (ASC 450) and Receivables (ASC 310). When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation of the allowance is assigned in accordance with ASC 310-10. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based on a continuing review of these portfolios. The following are included in our allowance for loan losses:
 
Specific reserves for impaired loans
An allowance for each pool of homogenous loans based on historical loss experience
Adjustments for qualitative and environmental factors allocated to pools of homogenous loans
When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the three months ended March 31, 2017 and 2016 , net charge-offs totaled $2.1 million or 0.19% of average loans annualized, and $0.3 million , or 0.03% of average loans annualized, respectively.
Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied commercial, commercial mortgages and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. Probability of default is calculated based on the historical rate of migration to impaired status during the last 25 quarters. During the three months ended March 31, 2017 , we increased the look-back period to 25 quarters from the 24 quarters used at December 31, 2016 . This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the core reserves calculated by the ALLL model are adequately considering the losses within a full credit cycle.
Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 25 quarter look-back period.
Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration:
 
Current underwriting policies, staff, and portfolio mix,
Internal trends of delinquency, nonaccrual and criticized loans by segment,
Risk rating accuracy, control and regulatory assessments/environment,
General economic conditions - locally and nationally,
Market trends impacting collateral values,
The competitive environment, as it could impact loan structure and underwriting, and
Valuation complexity by segment.
The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves.

22


The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 8 quarters as of March 31, 2017 . Our residential mortgage and consumer LEP remained at 4 quarters as of March 31, 2017 . We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP annually for our commercial portfolio and review the current 4 quarter LEP for the retail portfolio to determine the continued reasonableness of this assumption.
In prior periods, we had a component of the allowance for model estimation and complexity risk reserve. During the second quarter of 2016 as a result of continued improvement in the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance of loan losses.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.
The following tables provide the activity of our allowance for loan losses and loan balances for the three months ended March 31, 2017 :
 
 
Three months ended March 31, 2017
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential (1)
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
13,339

 
$
6,588

 
$
8,915

 
$
2,838

 
$
2,059

 
$
6,012

 
$
39,751

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

 
75

 
46

 
2

 
120

 
305

 
632

Provision (credit)
 
1,949

 
(441
)
 
(518
)
 
158

 
(114
)
 
1,080

 
2,114

Provision for acquired loans
 
88

 

 
(4
)
 
(23
)
 

 
(13
)
 
48

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$
6,241

 
$
39,826

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

 
$

 
$
1,395

 
$
500

 
$
887

 
$
194

 
$
4,836

Loans collectively evaluated for impairment
 
12,165

 
6,015

 
6,763

 
2,397

 
1,144

 
6,042

 
34,526

Acquired loans evaluated for impairment
 
180

 
15

 
177

 
64

 
23

 
5

 
464

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$
6,241

 
$
39,826

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

 
$
4,020

 
$
9,771

 
$
3,130

 
$
14,280

 
$
9,029

 
$
56,997

Loans collectively evaluated for impairment
 
1,175,911

 
919,508

 
928,925

 
225,718

 
158,430

 
405,285

 
3,813,777

Acquired nonimpaired loans
 
141,933

 
156,724

 
216,410

 
24,540

 
85,679

 
50,321

 
675,607

Acquired impaired loans
 
5,256

 
12,040

 
10,450

 
2,372