WSFS FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - WSFS FINANCIAL CORP	a906certification.htm
EX-31.2 - EXHIBIT 31.2 - WSFS FINANCIAL CORP	a302certification-cfo.htm
EX-31.1 - EXHIBIT 31.1 - WSFS FINANCIAL CORP	a302certification-ceo.htm

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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



☐	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.

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WSFS FINANCIAL CORPORATION

FORM 10-Q

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PART I. Financial Information
		Page
	Forward Looking Statements	3

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016	5

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016	6

	Consolidated Statements of Financial Condition as of March 31, 2017 and December 31, 2016	7

	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2017 and 2016	8

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	9

	Notes to the Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	56

PART II. Other Information

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults upon Senior Securities	58

Item 4.	Mine Safety Disclosure	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

	Signatures

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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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:


•	those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the markets in which the Company operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth;


•	the Company’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs;


•	possible additional loan losses and impairment in the collectability of loans;


•	changes in market interest rates, which may increase funding costs and reduce earning asset yields and thus reduce margin;


•	the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio;


•	the credit risk associated with the substantial amount of commercial real estate, construction and land development and commercial and industrial loans in our loan portfolio;


•	the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued in accordance with this statute and potential expenses associated with complying with such regulations;


•	the Company’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms;


•	possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations;


•	conditions in the financial markets that may limit the Company’s access to additional funding to meet its liquidity needs;


•	any impairment of the Company’s goodwill or other intangible assets;


•	failure of the financial and operational controls of the Company’s Cash Connect^® division;


•	the success of the Company’s growth plans, including the successful integration of past and future acquisitions;


•	the Company’s ability to fully realize the cost savings and other benefits of its acquisitions, business disruption following those acquisitions, and post-acquisition customer acceptance of the Company’s products and services and related customer disintermediation;


•	negative perceptions or publicity with respect to the Company’s trust and wealth management business;


•	system failure or cybersecurity breaches of the Company’s network;


•	the Company’s ability to recruit and retain key employees;


•	the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally;


•	the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks;


•	possible changes in the speed of loan prepayments by the Company’s customers and loan origination or sales volumes;


•	possible changes in the speed of prepayments of mortgage-backed securities due to changes in the interest rate environment, and the related acceleration of premium amortization on prepayments in the event that prepayments accelerate;

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•	regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its shareholders;


•	the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and


•	the effects of other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2016 and other documents filed by the Company with the Securities and Exchange Commission from time to time.

Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as required by law.

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended March 31,
	2017		2016
(Dollars in thousands, except per share data)	(Unaudited)
Interest income:
Interest and fees on loans	$	54,681	$	44,562
Interest on mortgage-backed securities	4,395		3,894
Interest and dividends on investment securities:
Taxable	117		77
Tax-exempt	1,132		1,143
Other interest income	501		370
	60,826		50,046
Interest expense:
Interest on deposits	3,075		2,118
Interest on senior debt	2,121		942
Interest on Federal Home Loan Bank advances	1,858		1,048
Interest on federal funds purchased and securities sold under agreements to repurchase	201		182
Interest on trust preferred borrowings	446		371
Interest on other borrowings	22		29
	7,723		4,690
Net interest income	53,103		45,356
Provision for loan losses	2,162		780
Net interest income after provision for loan losses	50,941		44,576
Noninterest income:
Credit/debit card and ATM income	8,131		6,901
Investment management and fiduciary income	8,039		5,254
Deposit service charges	4,397		4,276
Mortgage banking activities, net	1,185		1,654
Securities gains, net	320		305
Loan fee income	549		477
Bank owned life insurance income	275		231
Other income	5,196		4,570
	28,092		23,668
Noninterest expense:
Salaries, benefits and other compensation	28,836		22,876
Occupancy expense	5,162		4,270
Equipment expense	3,124		2,473
Professional fees	1,635		2,403
Data processing and operations expenses	1,618		1,542
Marketing expense	624		664
Loan workout and OREO expenses	521		503
FDIC expenses	529		838
Corporate development expense	338		569
Other operating expense	9,119		7,659
	51,506		43,797
Income before taxes	27,527		24,447
Income tax provision	8,590		8,677
Net income	$	18,937	$	15,770
Earnings per share:
Basic	$	0.60	$	0.53
Diluted	$	0.59	$	0.52

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

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended March 31,
	2017			2016
(Dollars in thousands)	(Unaudited)
Net Income	$	18,937		$	15,770
Other comprehensive income:
Net change in unrealized gains on investment securities available for sale
Net unrealized gains arising during the period, net of tax expense of $779 and $6,479, respectively	1,272			10,572
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $114 and $116, respectively	(206		)	(189		)
	1,066			10,383
Net change in securities held to maturity
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $59 and $65, respectively	(101		)	(103		)
Net change in unfunded pension liability
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($12) and $306, respectively	(23		)	478
Net change in cash flow hedge
Net unrealized loss arising during the period, net of tax benefit of ($69) and $0, respectively	(112		)	—
Total other comprehensive income	830			10,758
Total comprehensive income	$	19,767		$	26,528

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

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



	March 31, 2017			December 31, 2016
(Dollars in thousands, except per share and share data)	(Unaudited)
Assets:
Cash and due from banks	$	120,913		$	119,929
Cash in non-owned ATMs	730,747			698,454
Interest-bearing deposits in other banks including collateral of $3,380 at March 31, 2017 and December 31, 2016	3,603			3,540
Total cash and cash equivalents	855,263			821,923
Investment securities, available for sale (amortized cost of $800,612 at March 31, 2017 and $807,761 at December 31, 2016)	789,125			794,543
Investment securities, held to maturity-at cost (fair value of $163,241 at March 31, 2017 and $163,232 at December 31, 2016)	163,611			164,346
Loans, held for sale at fair value	29,394			54,782
Loans, net of allowance for loan losses of $39,826 at March 31, 2017 and $39,751 at December 31, 2016	4,552,151			4,444,375
Bank owned life insurance	101,700			101,425
Stock in Federal Home Loan Bank of Pittsburgh-at cost	20,002			38,248
Other real estate owned	3,582			3,591
Accrued interest receivable	16,712			17,027
Premises and equipment	49,194			48,871
Goodwill	165,960			167,539
Intangible assets	24,412			23,708
Other assets	81,793			84,892
Total assets	$	6,852,899		$	6,765,270
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	1,658,111		$	1,266,306
Interest-bearing demand	932,284			935,333
Money market	1,342,464			1,257,520
Savings	597,186			547,293
Time	321,325			332,624
Jumbo certificates of deposit – customer	248,861			260,560
Total customer deposits	5,100,231			4,599,636
Brokered deposits	276,599			138,802
Total deposits	5,376,830			4,738,438
Federal funds purchased and securities sold under agreements to repurchase	135,000			130,000
Federal Home Loan Bank advances	298,095			854,236
Trust preferred borrowings	67,011			67,011
Senior debt	152,177			152,050
Other borrowed funds	48,566			64,150
Accrued interest payable	2,931			1,151
Other liabilities	68,288			70,898
Total liabilities	6,148,898			6,077,934
Stockholders’ Equity:
Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,125,000 at March 31, 2017 and 55,995,219 at December 31, 2016	581			580
Capital in excess of par value	331,371			329,457
Accumulated other comprehensive loss	(6,787		)	(7,617		)
Retained earnings	643,816			627,078
Treasury stock at cost, 24,667,145 shares at March 31, 2017 and 24,605,145 shares at December 31, 2016	(264,980		)	(262,162		)
Total stockholders’ equity	704,001			687,336
Total liabilities and stockholders’ equity	$	6,852,899		$	6,765,270

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

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)



(Dollars and share data in thousands)	Shares	Common Stock		Capital in Excess of Par Value		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders' Equity
Balance, December 31, 2015	55,945,245	$	560	$	256,435	$	696		$	570,630		$	(247,850	)	$	580,471
Net Income	—	—		—		—			15,770			—			15,770
Other comprehensive income	—	—		—		10,758			—			—			10,758
Cash dividend, $0.06 per share	—	—		—		—			(1,783		)	—			(1,783		)
Issuance of common stock including proceeds from exercise of common stock options	61,498	1		659		—			—			—			660
Stock-based compensation expense	—	—		699		—			—			—			699
Repurchase of common stock, 301,871 shares	—	—		—		—			—			(8,995		)	(8,995		)
Balance, March 31, 2016	56,006,743	$	561	$	257,793	$	11,454		$	584,617		$	(256,845	)	$	597,580

Balance, December 31, 2016	55,995,219	$	580	$	329,457	$	(7,617	)	$	627,078		$	(262,162	)	$	687,336
Net Income	—	—		—		—			18,937			—			18,937
Other comprehensive income	—	—		—		830			—			—			830
Cash dividend, $0.07 per share	—	—		—		—			(2,199		)	—			(2,199		)
Issuance of common stock including proceeds from exercise of common stock options	129,781	1		1,093		—			—			—			1,094
Stock-based compensation expense	—	—		821		—			—			—			821
Repurchase of common stock, 62,000 shares	—	—		—		—			—			(2,818		)	(2,818		)
Balance, March 31, 2017	56,125,000	$	581	$	331,371	$	(6,787	)	$	643,816		$	(264,980	)	$	704,001

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

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Three months ended March 31,
	2017			2016
(Dollars in thousands)	(Unaudited)
Operating activities:
Net Income	$	18,937		$	15,770
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,162			780
Depreciation of premises and equipment, net	2,190			1,903
Amortization of fees and discounts, net	4,742			3,895
Amortization of intangible assets	857			549
Decrease in accrued interest receivable	315			48
Increase in other assets	(1,838		)	(3,534		)
Origination of loans held for sale	(85,833		)	(72,474		)
Proceeds from sales of loans held for sale	105,436			77,834
Gain on mortgage banking activities, net	(1,185		)	(1,654		)
Gain on sale of securities, net	(320		)	(305		)
Stock-based compensation expense	821			758
Increase in accrued interest payable	1,780			539
Decrease in other liabilities	(1,537		)	(7,930		)
Loss on sale of other real estate owned and valuation adjustments, net	39			76
Deferred income tax expense	3,190			3,293
Increase in value of bank owned life insurance	(275		)	(231		)
Increase in capitalized interest, net	(1,316		)	(1,193		)
Net cash provided by operating activities	$	48,165		$	18,124
Investing activities:
Purchases of investment securities held to maturity	—			(3,329		)
Repayments of investment securities held to maturity	250			1,335
Maturities and calls of investment securities held to maturity	—			400
Sale of investment securities available for sale	263,015			38,932
Purchases of investment securities available for sale	(375,687		)	(91,963		)
Repayments of investment securities available for sale	119,313			15,463
Net increase in loans	(106,933		)	(30,010		)
Purchases of stock of Federal Home Loan Bank of Pittsburgh	(54,990		)	(20,037		)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh	73,236			19,845
Sales of other real estate owned	1,707			1,442
Investment in premises and equipment	(2,480		)	(1,234		)
Net cash used for investing activities	$	(82,569	)	$	(69,156	)

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	Three months ended March 31,
	2017			2016
(Dollars in thousands)	(Unaudited)
Financing activities:
Net increase in demand and saving deposits	508,429			35,907
Decrease in time deposits	(22,998		)	(26,072		)
Increase in brokered deposits	137,797			43,353
Decrease in loan payable	(420		)	(407		)
Receipts from FHLB advances	42,415,835			28,349,212
Repayments of FHLB advances	(42,971,976		)	(28,310,900		)
Receipts from federal funds purchased and securities sold under agreement to repurchase	6,688,000			8,710,770
Repayments of federal funds purchased and securities sold under agreement to repurchase	(6,683,000		)	(8,711,445		)
Dividends paid	(2,199		)	(1,783		)
Issuance of common stock and exercise of common stock options	1,094			241
Purchase of treasury stock	(2,818		)	(8,995		)
Net cash provided by financing activities	$	67,744		$	79,881
Increase in cash and cash equivalents	33,340			28,849
Cash and cash equivalents at beginning of period	821,923			561,179
Cash and cash equivalents at end of period	$	855,263		$	590,028
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the period	$	5,943		$	4,151
Cash (received) paid for income taxes, net	(1,199		)	9,554
Loans transferred to other real estate owned	1,737			417
Loans transferred to portfolio from held-for-sale at fair value	6,470			1,510
Net change in accumulated other comprehensive income	830			10,758
Non-cash goodwill adjustments, net	(1,579		)	(358		)

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

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WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(UNAUDITED)

1. BASIS OF PRESENTATION

General

Our unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (the Company, our Company, we, our or us), Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital) and Cypress Capital Management, LLC (Cypress). We also have one unconsolidated subsidiary, WSFS Capital Trust III (the Capital Trust). WSFS Bank has three wholly-owned subsidiaries: WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC (Monarch).

Overview

Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers. The Federal Deposit Insurance Corporation (FDIC) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.

In preparing the unaudited Consolidated Financial Statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Amounts subject to significant estimates include the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, other-than-temporary impairment (OTTI), and the income tax valuation allowance. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform to Generally Accepted Accounting Principles (GAAP) in the U.S., prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2017. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our 2016 Annual Report on Form 10-K that was filed with the SEC on March 1, 2017 and is available at www.sec.gov or on our website at http://investors.wsfsbank.com/financials.cfm. Whenever necessary, reclassifications have been made to the prior period Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.

The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2016 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those disclosed in our 2016 Annual Report on Form 10-K.

Senior Debt

On June 13, 2016, the Company issued $100.0 million of senior unsecured fixed-to-floating rate notes. The senior unsecured notes mature on June 15, 2026 and have a fixed coupon rate of 4.50% from issuance until June 15, 2021 and a variable coupon rate of three month LIBOR plus 3.30% from June 15, 2021 until maturity. The senior unsecured notes may be redeemed beginning on June 15, 2021 at 100% of principal plus accrued and unpaid interest. The net proceeds from the issuance of the notes are being used for general corporate purposes.

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In 2012, we issued and sold $55.0 million in aggregate principal amount of 6.25% senior notes due 2019 (the “2012 senior debt”). The 2012 senior debt is unsecured and ranks equally with all of our other present and future unsecured unsubordinated obligations. The 2012 senior debt is effectively subordinated to our secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries. At our option, the 2012 senior debt is callable, in whole or in part, on September 1, 2017, or on any scheduled interest payment date thereafter, at a price equal to the outstanding principal amount to be redeemed plus accrued and unpaid interest. The 2012 senior debt matures on September 1, 2019.

Acquisitions in 2016

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

During the third and fourth quarters of 2016, respectively, we acquired the assets of Powdermill Financial Solutions LLC, a multi-family office serving an affluent clientele in the local community and throughout the U.S., and West Capital Management, Inc., an independent, fee-only wealth management firm providing fully customized solutions tailored to the unique needs of institutions and high net worth individuals which operates under a multi-family office philosophy. These acquisitions align with our strategic plan to expand our wealth management offerings and to diversify our fee-income generating businesses.

Correction of Prior Period Balances

The Consolidated Statements of Income for the quarter ended March 31, 2016 has been revised to correct an immaterial error in Noninterest income - Other revenue and Noninterest expense - Other operating expense related to revenue earned for cash servicing fees. As a result, the Consolidated Statement of Income has been revised to reflect these changes, as follows:



	Three months ended March 31, 2016
	As originally reported		Adjustments		As revised
Noninterest income - Other revenue	$	3,972	$	598	$	4,570
Noninterest expense - Other operating expense	7,061		598		7,659

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

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2017

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

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

In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, Investments - Equity Method and Joint Ventures (Topic 323). ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The standard is effective for all entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date. The Company adopted this accounting guidance during the quarter ended March 31, 2017 with no impact to our Consolidated Financial statements, as the standard is applied on a prospective basis.

Accounting Guidance Pending Adoption at March 31, 2017

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

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of adopting ASU 2016-02 on its Consolidated Financial Statements.

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

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

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

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

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

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

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In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The new guidance requires the amortization period for certain non-contingent callable debt securities held at a premium to end at the earliest call date of the debt security. If the call option is not exercised at the earliest call date, the guidance requires the debt security's effective yield to be reset based on the contractual payment terms of the debt security. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Use of the modified retrospective method, with a cumulative-effect adjustment to retained earnings, is required. In the period of adoption, a change in accounting principle disclosure is required. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

2. BUSINESS COMBINATIONS

Penn Liberty Financial Corporation

On August 12, 2016, we completed the acquisition of Penn Liberty. The acquisition of Penn Liberty was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The fair values are preliminary estimates and are subject to adjustment during the one-year measurement period after the acquisition.

In connection with the merger, the consideration transferred and the fair value of identifiable assets acquired and liabilities assumed, including remeasurement adjustments subsequent to the date of acquisition, are summarized in the following table:



(Dollars in thousands)	Fair Value
Consideration Transferred:
Common shares issued (1,806,748)	$	68,352
Cash paid to Penn Liberty stock and option holders	40,549
Value of consideration	108,901
Assets acquired:
Cash and due from banks	102,301
Investment securities	627
Loans	483,482
Premises and equipment	6,817
Deferred income taxes	6,542
Bank owned life insurance	8,666
Core deposit intangible	2,882
Other real estate owned	996
Other assets	12,092
Total assets	624,405
Liabilities assumed:
Deposits	568,706
Other borrowings	10,000
Other liabilities	3,977
Total liabilities	582,683
Net assets acquired:	41,722
Goodwill resulting from acquisition of Penn Liberty	$	67,179

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The following table details the change to goodwill recorded subsequent to acquisition:



(Dollars in thousands)	Fair Value
Goodwill resulting from the acquisition of Penn Liberty reported as of December 31, 2016	$	68,814
Effects of adjustments to:
Deferred income taxes	880
Other assets	(1,447		)
Other liabilities	(1,068		)
Adjusted goodwill resulting from the acquisition of Penn Liberty as of March 31, 2017	$	67,179

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

3. EARNINGS PER SHARE

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



	Three Months Ended March 31,
(Dollars and Shares in thousands, except per share data)	2017		2016
Numerator:
Net income	$	18,937	$	15,770
Denominator:
Weighted average basic shares	31,407		29,671
Dilutive potential common shares	942		558
Weighted average fully diluted shares	32,349		30,229
Earnings per share:
Basic	$	0.60	$	0.53
Diluted	$	0.59	$	0.52
Outstanding common stock equivalents having no dilutive effect	22		42

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4. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of our available-for-sale and held-to-maturity investment securities. None of our investment securities are classified as trading.



(Dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
Available-for-Sale Securities:
March 31, 2017
GSE	$	33,051	$	2	$	72	$	32,981
CMO	280,576		699		3,564		277,711
FNMA MBS	393,356		984		8,289		386,051
FHLMC MBS	65,228		204		1,261		64,171
GNMA MBS	27,767		275		445		27,597
Other investments	634		—		20		614
	$	800,612	$	2,164	$	13,651	$	789,125
December 31, 2016
GSE	$	35,061	$	9	$	60	$	35,010
CMO	264,607		566		3,957		261,216
FNMA MBS	414,218		950		9,404		405,764
FHLMC MBS	64,709		135		1,330		63,514
GNMA MBS	28,540		303		427		28,416
Other investments	626		—		3		623
	$	807,761	$	1,963	$	15,181	$	794,543



(Dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
Held-to-Maturity Securities⁽¹⁾
March 31, 2017
State and political subdivisions	$	163,611	$	646	$	1,016	$	163,241
December 31, 2016
State and political subdivisions	$	164,346	$	271	$	1,385	$	163,232

⁽¹⁾

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

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The scheduled maturities of investment securities available for sale and held to maturity at March 31, 2017 and December 31, 2016 are presented in the table below:



	Available for Sale ^{(1) (2)}
	Amortized		Fair
(Dollars in thousands)	Cost		Value
March 31, 2017
Within one year	$	20,012	$	19,997
After one year but within five years	18,059		17,981
After five years but within ten years	210,595		205,242
After ten years	551,312		545,291
	$	799,978	$	788,511
December 31, 2016
Within one year	$	16,009	$	16,017
After one year but within five years	19,052		18,992
After five years but within ten years	276,635		270,300
After ten years	495,439		488,611
	$	807,135	$	793,920

	Held to Maturity ⁽²⁾
	Amortized		Fair
(Dollars in thousands)	Cost		Value
March 31, 2017
Within one year	$	—	$	—
After one year but within five years	5,940		5,975
After five years but within ten years	10,482		10,511
After ten years	147,189		146,755
	$	163,611	$	163,241
December 31, 2016
Within one year	$	—	$	—
After one year but within five years	6,168		6,162
After five years but within ten years	8,882		8,870
After ten years	149,296		148,200
	$	164,346	$	163,232

⁽¹⁾ Included in the investment portfolio, but not in the table above, is a mutual fund with an amortized cost and fair value of $0.6 million as of March 31, 2017 and December 31, 2016 which has no stated maturity.


⁽²⁾	Actual maturities could differ

Mortgage-backed securities (MBS) have expected maturities that differ from their contractual maturities. These differences arise because borrowers have the right to call or prepay obligations with or without a prepayment penalty.

Investment securities with fair market values aggregating $615.8 million and $562.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2017 and December 31, 2016, respectively.

During the first three months of 2017, we sold $263.0 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and one security with an immaterial realized loss. During the first three months of 2016, we sold $38.9 million of investment securities categorized as available for sale, resulting in realized gains of $0.3 million and no realized losses. The cost basis of all investment securities sales is based on the specific identification method.

As of March 31, 2017 and December 31, 2016, our investment securities portfolio had remaining unamortized premiums of $16.3 million and $18.0 million, respectively, and unaccreted discounts of $0.6 million and $0.4 million, respectively.

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For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at March 31, 2017.



	Duration of Unrealized Loss Position
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-sale securities:
GSE	$	25,981	$	72	$	—	$	—	$	25,981	$	72
CMO	161,225		3,469		4,239		95		165,464		3,564
FNMA MBS	276,175		8,289		—		—		276,175		8,289
FHLMC MBS	41,765		1,261		—		—		41,765		1,261
GNMA MBS	16,236		445		—		—		16,236		445
Other investments	634		20		—		—		634		20
Total temporarily impaired investments	522,016		13,556		4,239		95		526,255		13,651

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Held-to-maturity securities:
State and political subdivisions	$	84,121	$	969	$	1,960	$	47	$	86,081	$	1,016
Total temporarily impaired investments	$	84,121	$	969	$	1,960	$	47	$	86,081	$	1,016



	Duration of Unrealized Loss Position
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-sale securities:
GSE	$	21,996	$	60	$	—	$	—	$	21,996	$	60
CMO	160,572		3,867		4,654		90		165,226		3,957
FNMA MBS	50,878		1,330		—		—		50,878		1,330
FHLMC MBS	300,403		9,404		—		—		300,403		9,404
GNMA MBS	16,480		427		—		—		16,480		427
Other investments	623		3		—		—		623		3
Total temporarily impaired investments	$	550,952	$	15,091	$	4,654	$	90	$	555,606	$	15,181

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Held-to-maturity securities:
State and political subdivisions	$	112,642	$	1,374	$	695	$	11	$	113,337	$	1,385
Total temporarily impaired investments	$	112,642	$	1,374	$	695	$	11	$	113,337	$	1,385

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At March 31, 2017, we owned investment securities totaling $612.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $14.7 million at March 31, 2017. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Our investment portfolio is reviewed each quarter for indications of OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

All securities, with the exception of one having a fair value of $1.0 million at March 31, 2017, were AA-rated or better at the time of purchase and remained investment grade at March 31, 2017. All securities were evaluated for OTTI at March 31, 2017 and December 31, 2016. The result of this evaluation showed no OTTI as of March 31, 2017 or December 31, 2016. The estimated weighted average duration of MBS was 5.34 years at March 31, 2017.

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5. LOANS

The following table shows our loan portfolio by category:



(Dollars in thousands)	March 31, 2017		December 31, 2016
Commercial and industrial	$	1,339,867	$	1,287,731
Owner-occupied commercial	1,092,292		1,078,162
Commercial mortgages	1,165,556		1,163,554
Construction	255,760		222,712
Residential ⁽¹⁾	281,760		289,611
Consumer	464,898		450,029
	4,600,133		4,491,799
Less:
Deferred fees, net	8,156		7,673
Allowance for loan losses	39,826		39,751
Net loans	$	4,552,151	$	4,444,375

⁽¹⁾ Includes Reverse Mortgages, at fair value of $22.5 million at March 31, 2017 and $22.6 million at December 31, 2016.

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



(Dollars in thousands)	March 31, 2017		December 31, 2016
Outstanding principal balance	$	38,418	$	41,574
Carrying amount	30,783		33,104
Allowance for loan losses	464		510

The following table presents the changes in accretable yield on the acquired credit impaired loans for the three months ended March 31, 2017:



(Dollars in thousands)	Three months ended March 31, 2017
Balance at beginning of period	$	5,150
Accretion	(792		)
Reclassification from nonaccretable difference	(144		)
Additions/adjustments	(112		)
Disposals	—
	$	4,102

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6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

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


•	Specific reserves for impaired loans


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


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

When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the three months ended March 31, 2017 and 2016, net charge-offs totaled $2.1 million or 0.19% of average loans annualized, and $0.3 million, or 0.03% of average loans annualized, respectively.

Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied commercial, commercial mortgages and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. Probability of default is calculated based on the historical rate of migration to impaired status during the last 25 quarters. During the three months ended March 31, 2017, we increased the look-back period to 25 quarters from the 24 quarters used at December 31, 2016. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the core reserves calculated by the ALLL model are adequately considering the losses within a full credit cycle.

Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 25 quarter look-back period.

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


•	Current underwriting policies, staff, and portfolio mix,


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


•	Risk rating accuracy, control and regulatory assessments/environment,


•	General economic conditions - locally and nationally,


•	Market trends impacting collateral values,


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


•	Valuation complexity by segment.

The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves.

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The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 8 quarters as of March 31, 2017. Our residential mortgage and consumer LEP remained at 4 quarters as of March 31, 2017. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP annually for our commercial portfolio and review the current 4 quarter LEP for the retail portfolio to determine the continued reasonableness of this assumption.

In prior periods, we had a component of the allowance for model estimation and complexity risk reserve. During the second quarter of 2016 as a result of continued improvement in the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance of loan losses.

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

The following tables provide the activity of our allowance for loan losses and loan balances for the three months ended March 31, 2017:



	Three months ended March 31, 2017
(Dollars in thousands)	Commercial			Owner-occupied Commercial			Commercial Mortgages			Construction			Residential⁽¹⁾			Consumer			Total
Allowance for loan losses
Beginning balance	$	13,339		$	6,588		$	8,915		$	2,838		$	2,059		$	6,012		$	39,751
Charge-offs	(1,255		)	(192		)	(104		)	(14		)	(11		)	(1,143		)	(2,719		)
Recoveries	84			75			46			2			120			305			632
Provision (credit)	1,949			(441		)	(518		)	158			(114		)	1,080			2,114
Provision for acquired loans	88			—			(4		)	(23		)	—			(13		)	48
Ending balance	$	14,205		$	6,030		$	8,335		$	2,961		$	2,054		$	6,241		$	39,826
Period-end allowance allocated to:
Loans individually evaluated for impairment	$	1,860		$	—		$	1,395		$	500		$	887		$	194		$	4,836
Loans collectively evaluated for impairment	12,165			6,015			6,763			2,397			1,144			6,042			34,526
Acquired loans evaluated for impairment	180			15			177			64			23			5			464
Ending balance	$	14,205		$	6,030		$	8,335		$	2,961		$	2,054		$	6,241		$	39,826
Period-end loan balances evaluated for:
Loans individually evaluated for impairment ⁽²⁾	$	16,767		$	4,020		$	9,771		$	3,130		$	14,280		$	9,029		$	56,997
Loans collectively evaluated for impairment	1,175,911			919,508			928,925			225,718			158,430			405,285			3,813,777
Acquired nonimpaired loans	141,933			156,724			216,410			24,540			85,679			50,321			675,607
Acquired impaired loans	5,256			12,040			10,450			2,372			866			263			31,247
Ending balance⁽³⁾	$	1,339,867		$	1,092,292		$	1,165,556		$	255,760		$	259,255		$	464,898		$	4,577,628


⁽¹⁾	Period-end loan balance excludes Reverse Mortgages, at fair value of $22.5 million.


⁽²⁾	The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $17.3 million for the period ending March 31, 2017. Accruing troubled debt restructured loans are considered impaired loans.


⁽³⁾	Ending loan balances do not include net deferred fees.

Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three months ended March 31, 2016:



	Three months ended March 31, 2016
(Dollars in thousands)	Commercial			Owner - occupied Commercial		Commercial Mortgages			Construction			Residential⁽¹⁾			Consumer			Complexity Risk⁽²⁾		Total
Allowance for loan losses
Beginning balance	$	11,156		$	6,670	$	6,487		$	3,521		$	2,281		$	5,964		$	1,010	$	37,089
Charge-offs	(179		)	—		(17		)	(26		)	(14		)	(631		)

WSFS FINANCIAL CORP - FORM 10-Q - May 9, 2017

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