Edgar Filing: WSFS FINANCIAL CORP

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

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

For the transition period from to

Commission File Number 001-35638

WSFS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		22-2866913
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification Number)

WSFS Bank Center, 500 Delaware Avenue, Wilmington, Delaware		19801
(Address of principal executive offices)		(Zip Code)

(302) 792-6000

Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

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

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


Common Stock, par value $.01 per share		31,324,432
(Title of Class)		(Shares Outstanding)

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX


PART I. Financial Information

		Page
Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015		3

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015		4

	Consolidated Statements of Condition as of September 30, 2016 and December 31, 2015		5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015		6

	Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2016 and 2015		8

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		58

Item 4.	Controls and Procedures		58

PART II. Other Information

Item 1.	Legal Proceedings		59

Item 1A.	Risk Factors		59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59

Item 3.	Defaults upon Senior Securities		59

Item 4.	Mine Safety Disclosure		59

Item 5.	Other Information		59

Item 6.	Exhibits		59

Signatures			60

Exhibit 31.1	Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2	Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS	Instance Document
Exhibit 101.SCH	Schema Document
Exhibit 101.CAL	Calculation Linkbase Document
Exhibit 101.LAB	Labels Linkbase Document
Exhibit 101.PRE	Presentation Linkbase Document
Exhibit 101.DEF	Definition Linkbase Document

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(Unaudited)
(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans	$	48,546	$	38,437	$	136,568	$	111,771
Interest on mortgage-backed securities		3,854		3,588		11,658		10,544
Interest and dividends on investment securities:
Taxable		80		56		242		177
Tax-exempt		1,134		819		3,418		2,410
Interest on reverse mortgage loans		1,303		1,561		3,826		3,963
Other interest income		420		396		1,174		1,898

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

Interest expense:
Interest on deposits		2,412		1,587		6,734		5,354
Interest on senior debt		2,119		942		4,236		2,825
Interest on Federal Home Loan Bank advances		1,225		868		3,397		2,332
Interest on trust preferred borrowings		415		343		1,183		1,009
Interest on other borrowings		145		120		545		339

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

Net interest income		49,021		40,997		140,791		118,904
Provision for loan losses		5,828		1,453		7,862		6,012

Net interest income after provision for loan losses		43,193		39,544		132,929		112,892

Noninterest income:
Credit/debit card and ATM income		7,776		6,486		21,930		18,975
Wealth management income		6,074		5,373		17,610		16,173
Deposit service charges		4,482		4,338		13,100		12,342
Mortgage banking activities, net		2,555		1,251		6,025		4,544
Securities gains, net		1,040		76		1,890		1,004
Loan fee income		542		405		1,499		1,337
Bank owned life insurance income		255		162		697		544
Other income		4,125		3,574		12,017		10,299

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

Noninterest expense:
Salaries, benefits and other compensation		24,804		20,784		71,189		62,139
Occupancy expense		4,335		3,757		12,560		11,272
Equipment expense		2,653		2,059		7,642		6,100
Professional fees		1,554		2,039		6,891		5,264
Data processing and operations expenses		1,500		1,570		4,564		4,451
Marketing expense		712		619		2,177		2,210
Loan workout and OREO expenses		511		166		1,059		495
FDIC expenses		469		786		2,080		2,142
Corporate development expense		5,885		855		7,003		2,137
Other operating expense		8,074		6,070		22,558		20,062

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

Income before taxes		19,545		22,504		69,974		61,838
Income tax provision		6,823		8,078		24,004		22,289

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

Earnings per share:
Basic	$	0.42	$	0.52	$	1.54	$	1.41
Diluted	$	0.41	$	0.51	$	1.50	$	1.39

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

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(Unaudited)						(Unaudited)
(Dollars in thousands)
Net Income	$	12,722		$	14,426		$	45,970		$	39,549
Other comprehensive income (loss):
Net change in unrealized (losses) gains on investment securities available for sale
Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of ($682), $3,787, $8,668 and $2,892, respectively		(1,112	)		6,178			14,143			4,721
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $395, $29, $718 and $381, respectively		(645	)		(47	)		(1,172	)		(623	)

		(1,757	)		6,131			12,971			4,098
Net change in securities held-to-maturity
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $60, $55, $187, $175, respectively		(102	)		(104	)		(305	)		(312	)
Net change in unfunded pension liability
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($14), ($9), $266 and ($27), respectively		(20	)		(15	)		436			(45	)
Net change in cash flow hedge
Net unrealized gain arising during the period, net of tax expense of $38, $0, $38, and $0, respectively		61			—			61			—

Total other comprehensive (loss) income		(1,818	)		6,012			13,163			3,741

Total comprehensive income	$	10,904		$	20,438		$	59,133		$	43,290

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

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION


	September 30,			December 31,
	2016			2015
(Dollars in thousands, except share data)	(Unaudited)
Assets:
Cash and due from banks	$	119,159		$	83,065
Cash in non-owned ATMs		694,022			477,924
Interest-bearing deposits in other banks		224			190

Total cash and cash equivalents		813,405			561,179
Investment securities, available for sale		777,835			721,029
Investment securities, held to maturity-at cost		164,880			165,862
Loans, held for sale at fair value		61,198			41,807
Loans, net of allowance for loan losses of $39,028 at September 30, 2016 and $37,089 at December 31, 2015		4,347,027			3,729,050
Reverse mortgage loans		23,120			24,284
Bank-owned life insurance		101,185			90,208
Stock in Federal Home Loan Bank of Pittsburgh-at cost		36,710			30,519
Assets acquired through foreclosure		3,232			5,080
Accrued interest receivable		15,257			14,040
Premises and equipment		47,094			39,569
Goodwill		155,436			85,212
Intangible assets		17,273			10,083
Other assets		63,941			66,715

Total assets	$	6,627,593		$	5,584,637

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	1,245,127		$	958,238
Interest-bearing demand		967,248			784,619
Money market		1,251,315			1,090,050
Savings		538,093			439,918
Time		329,401			333,000
Jumbo certificates of deposit – customer		257,816			254,011

Total customer deposits		4,589,000			3,859,836
Brokered deposits		144,639			156,730

Total deposits		4,733,639			4,016,566
Federal funds purchased and securities sold under agreements to repurchase		81,000			128,200
Federal Home Loan Bank advances		817,167			669,514
Trust preferred borrowings		67,011			67,011
Senior debt		151,914			53,675
Other borrowed funds		27,615			14,486
Accrued interest payable		3,658			801
Other liabilities		53,579			53,913

Total liabilities		5,935,583			5,004,166

Stockholders’ Equity:
Common stock $0.01 par value, 65,000,000 shares authorized; issued 55,903,577 at September 30, 2016 and 55,945,245 at December 31, 2015		580			560
Capital in excess of par value		327,148			256,435
Accumulated other comprehensive income		13,859			696
Retained earnings		611,163			570,630
Treasury stock at cost, 24,569,145 shares at September 30, 2016 and 26,182,401 shares at December 31, 2015		(260,740	)		(247,850	)

Total stockholders’ equity		692,010			580,471

Total liabilities and stockholders’ equity	$	6,627,593		$	5,584,637

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

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
	September 30,
	2016			2015
	(Unaudited)
(Dollars in thousands)
Operating activities:
Net Income	$	45,970		$	39,549
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,862			6,012
Depreciation of premises and equipment, net		5,587			4,650
Amortization of fees and discounts, net		13,921			11,221
Amortization of intangible assets		1,260			1,258
(Increase) decrease in accrued interest receivable		(239	)		12
Decrease (increase) decrease in other assets		8,028			(253	)
Origination of loans held-for-sale		(252,368	)		(350,584	)
Proceeds from sales of loans held-for-sale		230,864			348,760
Gain on mortgage banking activities, net		(6,025	)		(4,544	)
Gain on sale of securities, net		(1,890	)		(1,004	)
Stock-based compensation expense		2,253			3,319
Increase in accrued interest payable		2,857			756
(Decrease) increase in other liabilities		(2,286	)		1,524
Loss (gain) on sale of other real estate owned and valuation adjustments, net		230			(298	)
Deferred income tax expense		5,364			2,418
Increase in value of bank-owned life insurance		(2,311	)		(527	)
Increase in capitalized interest, net, on reverse mortgage loans		(3,834	)		(4,088	)

Net cash provided by operating activities	$	55,243		$	58,181

Investing activities:
Purchases of investment securities held-to-maturity		(3,329	)		(19,195	)
Repayments of investment securities held-to-maturity		—			970
Maturities and calls of investment securities held-to-maturity		2,840			3,881
Sale of investment securities available-for-sale		155,789			117,380
Purchases of investment securities available-for-sale		(254,993	)		(209,947	)
Repayments of investment securities available-for-sale		62,798			80,293
Repayments on reverse mortgages		6,134			9,559
Disbursements for reverse mortgages		(1,136	)		(649	)
Net increase in loans		(146,498	)		(181,290	)
Net cash for business combinations		51,788			—
Net increase in stock of FHLB		(6,191	)		(4,665	)
Sales of assets acquired through foreclosure, net		4,069			5,278
Investment in premises and equipment, net		(7,677	)		(4,968	)

Net cash used for investing activities	$	(136,406	)	$	(203,353	)


	Nine months ended
	September 30,
	2016			2015
	(Unaudited)
(Dollars in thousands)
Financing activities:
Net increase in demand and saving deposits		221,336			76,241
Decrease in time deposits		(57,383	)		(116,863	)
(Decrease) increase in brokered deposits		(12,091	)		36,624
(Decrease) increase in loan payable		(366	)		61
Receipts from FHLB advances		90,314,153			46,342,654
Repayments of FHLB advances		(90,166,500	)		(46,105,521	)
Receipts from federal funds purchased and securities sold under agreement to repurchase		21,676,620			22,843,325
Repayments of federal funds purchased and securities sold under agreement to repurchase		(21,723,820	)		(22,855,550	)
Maturity of repurchase agreement		—			(25,000	)
Dividends paid		(5,437	)		(4,216	)
Issuance of common stock and exercise of common stock options		1,918			2,688
Issuance of senior debt		97,849			—
Purchase of treasury stock		(12,890	)		(28,273	)

Net cash provided by financing activities	$	333,389		$	166,170

Increase in cash and cash equivalents		252,226			20,998
Cash and cash equivalents at beginning of period		561,179			508,039

Cash and cash equivalents at end of period	$	813,405		$	529,037

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the period	$	13,238		$	11,103
Cash paid for income taxes, net		18,640			16,558
Loans transferred to other real estate owned		1,455			2,545
Loans transferred to portfolio from held-for-sale at fair value		6,337			104
Net change in accumulated other comprehensive income		13,163			3,741
Fair value of assets acquired, net of cash received		526,767			—
Fair value of liabilities assumed		583,517			—
Non-cash goodwill adjustments, net		(1,496	)		136

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

WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(UNAUDITED)

1. BASIS OF PRESENTATION

General

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

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

AICPA: American Institute of Certified Public Accountants

Allowance: Allowance for loan losses or ALLL

Alliance: Alliance Bancorp Inc. of Pennsylvania

Array: Formerly Array Financial Group (WSFS Mortgage)

Arrow: Arrow Land Transfer

ASC: Accounting standard codification

Associate: Employee

ASU: Accounting standard update

BCBS: Basel Committee on Banking Supervision

C&I: Commercial & Industrial (loans)

CMO: Collateralized mortgage obligation

Cypress: Cypress Capital Management, LLC

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

DTA: Deferred tax asset

Exchange Act: Securities Exchange Act of 1934

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

Federal Reserve: Board of Governors of the Federal Reserve System

Monarch: Monarch Entity Services, LLC

FHLB: Federal Home Loan Bank

FHLMC: Federal Home Loan Mortgage Corporation

FNMA: Federal National Mortgage Association

GAAP: U.S. Generally Accepted Accounting Principles

GNMA: Government National Mortgage Association

GSE: U.S. Government and government sponsored enterprises

HPA: House Price Appreciation

IRR: Internal Rate of Return

NSFR: Net stable funding ratio

MBS: Mortgage-backed securities

OCC: Office of the Comptroller of the Currency

OREO: Other real estate owned

OTTI: Other-than-temporary impairment

TDR: Troubled Debt Restructurings

Overview

Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States. We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers. The FDIC insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 76 offices located in Delaware (46), Pennsylvania (28), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.

Amounts subject to significant estimates include the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, reverse mortgage loans, OTTI, and income tax valuation allowance. Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform to GAAP, prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2016. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our 2015 Annual Report on Form 10-K that was filed with the SEC on February 29, 2016 and is available at www.sec.gov or on our website at http://investors.wsfsbank.com/financials.cfm.

Whenever necessary, reclassifications have been made to the prior period Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.

The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2015 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those contained in our 2015 Annual Report on Form 10-K.

Common Stock Split

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

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

Senior Unsecured Debt

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

Acquisitions

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

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

Derivatives and Hedging

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

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2016

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718). ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. The standard is effective for public business entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted if the entire standard is adopted. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted ASU 2016-09 in the second quarter of 2016 and recognized a $0.7 million tax benefit in the Consolidated Statements of Operations. In addition, the Company presented excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method. The Company also made an accounting policy election to account for forfeitures as they occur. This policy election did not have a material impact on the Company’s consolidated financial statements. Adoption of all other changes did not have an impact on our Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The standard update resolves the diverse accounting treatment for these share-based payments by requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 was effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this accounting guidance did not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

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

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

Accounting Guidance Pending Adoption at September 30, 2016

In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-9 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016- 08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Company is currently evaluating the impact of adopting ASU 2014-9 and associated guidance on its Consolidated Financial Statements.

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

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

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

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

In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, Investments - Equity Method and Joint Ventures (Topic 323). ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The standard is effective for all entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date. The Company does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net, Revenue from Contracts with Customers (Topic 606). ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. The amendments in the standard affect the guidance in ASU 2014-09, which is effective for public business entities in annual and interim reporting periods in fiscal years beginning after December 15, 2017. Early application is permitted for all entities, but not before annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting ASU 2016-8 on its Consolidated Financial Statements.

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

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

2. BUSINESS COMBINATIONS

Penn Liberty Financial Corporation

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

The acquisition of Penn Liberty was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The fair values are preliminary estimates and are subject to adjustment during the one year measurement period after the acquisition. We are currently evaluating the fair values of replacement equity awards, fixed assets acquired and leases assumed in the transaction. The excess of consideration paid over the preliminary fair value of net assets acquired was recorded as goodwill in the amount of $65.2 million, which is not amortizable and is not deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. The Company also recorded $2.9 million in core deposit intangibles which are being amortized over ten years using the straight-line depreciation method.

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


(Dollars in thousands)	Fair Value
Consideration Paid:
Common shares issued (1,806,748)	$	66,759
Cash paid to Penn Liberty stock and option holders		40,549

Value of consideration		107,308
Assets acquired:
Cash and due from banks		102,301
Investment securities		627
Loans		483,482
Premises and equipment		7,364
Deferred income taxes		6,452
Bank owned life insurance		8,666
Core deposit intangible		2,882
Other real estate owned		996
Other assets		10,595

Total assets		623,365
Liabilities assumed:
Deposits		568,706
Other borrowings		10,000
Other liabilities		2,557

Total liabilities		581,263
Net assets acquired:		42,102

Goodwill resulting from acquisition of Penn Liberty	$	65,206

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

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

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

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

Powdermill Financial Solutions LLC

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

Alliance Bancorp, Inc. of Pennsylvania

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

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

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


(Dollars in thousands)	Fair Value
Consideration Paid:
Common shares issued (2,459,120)	$	71,345
Cash paid to Alliance stockholders		26,576

Value of consideration		97,921
Assets acquired:
Cash and due from banks		67,439
Investment securities		3,002
Loans		307,695
Premises and equipment		2,685
Deferred income taxes		7,669
Bank owned life insurance		12,923
Core deposit intangible		2,635
Other real estate owned		768
Other assets		3,365

Total assets		408,181
Liabilities assumed:
Deposits		341,682
Other Borrowings		2,826
Other liabilities		681

Total liabilities		345,189
Net assets acquired:		62,992

Goodwill resulting from acquisition of Alliance	$	34,929

The following table details the changes to goodwill in 2016:


(Dollars in thousands)	Fair Value
Goodwill resulting from the acquisition of Alliance reported as of December 31, 2015	$	36,425
Effects of adjustments to:
Deferred income taxes		(125	)
Other assets		(379	)
Other liabilities		(992	)

Adjusted goodwill resulting from the acquisition of Alliance as of September 30, 2016	$	34,929

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

3. EARNINGS PER SHARE

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars and Shares in thousands, Except Per Share Data)	2016		2015		2016		2015
Numerator:
Net income	$	12,722	$	14,426	$	45,970	$	39,549

Denominator:
Weighted average basic shares		30,520		27,721		29,914		28,035
Dilutive potential common shares		797		511		747		468

Weighted average fully diluted shares		31,317		28,232		30,661		28,503

Earnings per share:
Basic	$	0.42	$	0.52	$	1.54	$	1.41

Diluted	$	0.41	$	0.51	$	1.50	$	1.39

Outstanding common stock equivalents having no dilutive effect		1		83		10		184

4. INVESTMENT SECURITIES

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gain		Loss		Value
Available-for-Sale Securities:
September 30, 2016
GSE	$	35,070	$	66	$	—	$	35,136
CMO		259,379		5,396		34		264,741
FNMA MBS		370,292		10,149		150		380,291
FHLMC MBS		66,326		1,846		—		68,172
GNMA MBS		28,264		646		42		28,868
Other investments		627		—		—		627

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

December 31, 2015
GSE	$	31,041	$	—	$	127	$	30,914
CMO		253,189		713		2,414		251,488
FNMA MBS		320,105		1,081		2,715		318,471
FHLMC MBS		99,350		405		313		99,442
GNMA MBS		20,387		420		93		20,714

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gain		Loss		Value
Held-to-Maturity Securities⁽¹⁾
September 30, 2016
State and political subdivisions	$	164,880	$	4,713	$	31	$	169,562

December 31, 2015
State and political subdivisions	$	165,862	$	1,943	$	62	$	167,743

⁽¹⁾

Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $2.4 million and $2.9 million at September 30, 2016 and December 31, 2015, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.

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


	Available-for-Sale ⁽¹⁾
	Amortized		Fair
(Dollars in thousands)	Cost		Value
September 30, 2016
Within one year	$	8,995	$	9,010
After one year but within five years		26,075		26,125
After five years but within ten years		281,237		289,917
After ten years		443,024		452,156

	$	759,331	$	777,208

December 31, 2015
Within one year	$	3,997	$	3,995
After one year but within five years		30,009		29,840
After five years but within ten years		218,023		215,018
After ten years		472,043		472,176

	$	724,072	$	721,029


	Held-to-Maturity
	Amortized		Fair
(Dollars in thousands)	Cost		Value
September 30, 2016
Within one year	$	—	$	—
After one year but within five years		5,097		5,180
After five years but within ten years		9,030		9,219
After ten years		150,753		155,163

	$	164,880	$	169,562

December 31, 2015
Within one year	$	1,486	$	1,488
After one year but within five years		3,465		3,456
After five years but within ten years		7,939		8,045
After ten years		152,972		154,754

	$	165,862	$	167,743

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

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

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

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

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

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

Duration of Unrealized Loss Position

Less than 12 months

12 months or longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Loss

Value

Loss

Value

Loss

Available-for-sale securities:

CMO

7,690

5,144

12,834

FNMA MBS

37,371

150

—

37,371

150

GNMA MBS

9,311

—

9,311

Total temporarily impaired investments

54,372

193

5,144

59,516

226

Less than 12 months

12 months or longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Loss

Value

Loss

Value

Loss

Held-to-maturity securities:

State and political subdivisions

3,372

708

4,080

Total temporarily impaired investments

3,372

708

4,080

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


	Duration of Unrealized Loss Position
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-sale securities:
GSE	$	30,914	$	127	$	—	$	—	$	30,914	$	127
CMO		139,486		1,703		26,536		711		166,022		2,414
FNMA MBS		214,465		2,715		—		—		214,465		2,715
FHLMC MBS		41,791		136		4,025		177		45,816		313
GNMA MBS		4,073		29		2,377		64		6,450		93

Total temporarily impaired investments	$	430,729	$	4,710	$	32,938	$	952	$	463,667	$	5,662


	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Held-to-maturity securities:
State and political subdivisions	$	9,845	$	62	$	—	$	—	$	9,845	$	62

Total temporarily impaired investments	$	9,845	$	62	$	—	$	—	$	9,845	$	62

At September 30, 2016, we owned investment securities totaling $63.6 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $0.3 million at September 30, 2016. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Our investment portfolio is reviewed each quarter for indications of OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

All securities, with the exception of one, were AA-rated or better at the time of purchase and remained investment grade at September 30, 2016. All securities were evaluated for OTTI at September 30, 2016 and December 31, 2015. The result of this evaluation showed no OTTI as of September 30, 2016 or December 31, 2015. The estimated weighted average duration of MBS was 4.3 years at September 30, 2016.

5. LOANS

The following table shows our loan portfolio by category:


	September 30,		December 31,
(Dollars in thousands)	2016		2015
Commercial and industrial	$	1,266,717	$	1,061,597
Owner-occupied commercial		1,057,645		880,643
Commercial mortgages		1,153,903		966,698
Construction		208,976		245,773
Residential		268,711		259,679
Consumer		438,158		360,249

		4,394,110	$	3,774,639
Less:
Deferred fees, net		8,055	$	8,500
Allowance for loan losses		39,028		37,089

Net loans	$	4,347,027	$	3,729,050

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


(Dollars in thousands)	September 30, 2016		December 31, 2015
Outstanding principal balance	$	46,892	$	38,067
Carrying amount		37,829		32,658
Allowance for loan losses		274		132

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


(Dollars in thousands)	January 1 through September 30, 2016
Balance at beginning of period	$	4,764
Accretion		(1,933	)
Reclassification from nonaccretable difference		1,086
Additions/adjustments		344
Disposals		(7	)

Balance at the end of the period	$	4,254

6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

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

•

Specific reserves for impaired loans

•

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

•

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

When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the nine months ended September 30, 2016, net charge-offs totaled $5.9 million or 0.20% of average loans annualized, compared to $9.0 million, or 0.36% of average loans annualized, during the nine months ended September 30, 2015.

Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied, commercial real estate and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. Probability of default is calculated based on the historical rate of migration to impaired status during the last 23 quarters. During 2016, we increased the look-back period to 23 quarters from the 20 quarters used at December 31, 2015. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the core reserves calculated by the ALLL model are adequately considering the losses within a full credit cycle.

Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 23 quarter look-back period.

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

•

Current underwriting policies, staff, and portfolio mix,

•

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

•

Risk rating accuracy, control and regulatory assessments/environment,

•

General economic conditions - locally and nationally,

•

Market trends impacting collateral values,

•

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

•

Valuation complexity by segment.

The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves. Continued economic improvement and continued refinement of the quantitative model have driven an overall reduction in qualitative factors during the period.

The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately 8 quarters as of September 30, 2016. Our residential mortgage and consumer LEP remained at 4 quarters as of September 30, 2016. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our commercial LEP at least annually.

The final component of the allowance in prior periods is the reserve for model estimation and complexity risk. The calculation of this reserve is generally quantitative; however, qualitative estimates of valuations and risk assessment, and methodology judgments are necessary in order to capture factors not already included in other components in our allowance for loan losses methodology. We review qualitative estimates of valuation factors quarterly and management uses its judgement to make adjustments based on current trends. During the second quarter of 2016 as a result of continued improvement in the model and normal review of the factors, we removed the model estimation and complexity risk reserve from our calculation of the allowance of loan losses.

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

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


(Dollars in thousands)	Commercial			Owner-Occupied Commercial			Commercial Mortgages			Construction			Residential			Consumer			Complexity Risk ⁽¹⁾			Total
Three months ended September 30, 2016
Allowance for loan losses
Beginning balance	$	11,402		$	6,723		$	8,135		$	3,308		$	2,352		$	5,826		$	—		$	37,746
Charge-offs		(3,737	)		(1,415	)		(1	)		(30	)		(43	)		(518	)		—			(5,744	)
Recoveries		223			15			197			440			33			290			—			1,198
Provision (credit)		3,714			1,437			1,089			(824	)		(179	)		401			—			5,638
Provision for acquired loans		117			185			(48	)		(76	)		12			—			—			190

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

Nine months ended September 30, 2016
Allowance for loan losses
Beginning balance	$	11,156		$	6,670		$	6,487		$	3,521		$	2,281		$	5,964		$	1,010		$	37,089
Charge-offs		(4,643	)		(1,556	)		(79	)		(59	)		(72	)		(1,967	)		—			(8,376	)
Recoveries		557			66			310			486			112			922			—			2,453
Provision (credit)		4,551			1,564			2,650			(1,104	)		(177	)		1,118			(1,010	)	$	7,592
Provision for acquired loans		98			201			4			(26	)		31			(38	)		—			270

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

Period-end allowance allocated to:
Loans individually evaluated for impairment	$	692		$	—		$	1,264		$	215		$	989		$	201		$	—		$	3,361
Loans collectively evaluated for impairment		10,974			6,923			7,982			2,549			1,167			5,798			—			35,393
Acquired loans evaluated for impairment		53			22			126			54			19			—			—			274

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

Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	4,198		$	2,510		$	7,165		$	1,419		$	13,957		$	8,105		$	—		$	37,354	⁽²⁾
Loans collectively evaluated for impairment		1,077,258			869,051			904,328			182,338			150,318			368,428			—			3,551,721
Acquired nonimpaired loans		175,570			175,411			229,530			21,627			103,537			61,257			—			766,932
Acquired impaired loans		9,691			10,673			12,880			3,592			899			368			—			38,103

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

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


(Dollars in thousands)	Commercial			Owner Occupied Commercial			Commercial Mortgages			Construction		Residential			Consumer			Complexity Risk (1)			Total
Three months ended September 30, 2015
Allowance for loan losses
Beginning balance	$	14,512		$	6,733		$	6,831		$	3,313	$	2,709		$	5,788		$	959		$	40,845
Charge-offs		(4,147	)		(26	)		(804	)		—		(130	)		(1,499	)		—			(6,606	)
Recoveries		84			40			14			19		158			405			—			720
Provision (credit)		303			(62	)		231			306		(362	)		1,086			11			1,513
Provision for acquired loans		—			—			(71	)		104		(92	)		(1	)		—			(60	)

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

Nine months ended September 30, 2015
Allowance for loan losses
Beginning balance	$	12,837		$	6,643		$	7,266		$	2,596	$	2,523		$	6,041		$	1,520		$	39,426
Charge-offs		(6,184	)		(623	)		(808	)		—		(397	)		(2,570	)		—			(10,582	)
Recoveries		198			62			83			179		195			839			—			1,556
Provision (credit)		3,485			574			(508	)		863		50			1,460			(550	)		5,374
Provision for acquired loans		416			29			168			104		(88	)		9			—			638

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

Period-end allowance allocated to:
Loans individually evaluated for impairment	$	993		$	—		$	241		$	214	$	934		$	202		$	—		$	2,584
Loans collectively evaluated for impairment		9,406			6,657			5,907			3,527		1,348			5,577			970			33,392
Acquired loans evaluated for impairment		353			28			53			1		1			—			—			436

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

Period-end loan balances:
Loans individually evaluated for impairment	$	5,775		$	1,170		$	6,805		$	1,419	$	14,613		$	7,749		$	—		$	37,531	⁽²⁾
Loans collectively evaluated for impairment		900,660			770,246			836,556			190,925		169,566			327,524			—			3,195,477
Acquired nonimpaired loans		28,998			37,937			25,555			8,223		15,137			5,930			—			121,780
Acquired impaired loans		2,627			2,195			5,400			2,594		380			7			—			13,203

Ending balance	$	938,060		$	811,548		$	874,316		$	203,161	$	199,696		$	341,210		$	—		$	3,367,991	⁽³⁾

⁽¹⁾	Represents the portion of the allowance for loan losses established to capture factors not already included in other components in our allowance for loan losses methodology.

⁽²⁾	The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $14.2 million and $13.6 million for the periods ending September 30, 2016 and 2015, respectively. Accruing troubled debt restructured loans are considered impaired loans.

⁽³⁾	Ending loan balances do not include deferred costs.

Nonaccrual and Past Due Loans

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

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

September 30, 2016

(In Thousands)

30–59 Days
Past Due and
Still Accruing

60–89 Days
Past Due and
Still Accruing

Greater Than
90 Days
Past Due and
Still Accruing

Total Past
Due
And Still
Accruing

Accruing
Current
Balances

Acquired
Impaired
Loans

Nonaccrual
Loans

Total
Loans

Commercial

354

1,297

—

1,651

1,251,430

9,691

3,945

1,266,717

Owner-occupied commercial

572

—

572

1,043,890

10,673

2,510

1,057,645

Commercial mortgages

3,096

6,902

—

9,998

1,123,939

12,880

7,086

1,153,903

Construction

—

205,384

3,592

—

208,976

Residential

4,867

157

—

5,024

257,308

899

5,480

268,711

Consumer

788

135

271

1,194

432,445

368

4,151

438,158

Total (1)

9,677

8,491

271

18,439

4,314,396

38,103

23,172

4,394,110

% of Total Loans

0.22

0.19

0.01

0.42

98.18

0.87

0.53

100

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


December 31, 2015 (In Thousands)	30–59 Days Past Due and Still Accruing			60–89 Days Past Due and Still Accruing			Greater Than 90 Days Past Due and Still Accruing			Total Past Due And Still Accruing			Accruing Current Balances			Acquired Impaired Loans			Nonaccrual Loans			Total Loans
Commercial	$	1,686		$	270		$	12,355		$	14,311		$	1,028,973		$	12,985		$	5,328		$	1,061,597
Owner-occupied commercial		713			217			4,886			5,816			869,048			4,688			1,091			880,643
Commercial mortgages		141			4			288			433			952,426			10,513			3,326			966,698
Construction		—			—			—			—			242,229			3,544			—			245,773
Residential		5,263			621			251			6,135			245,307			950			7,287			259,679
Consumer		1,222			36			252			1,510			354,599			7			4,133			360,249

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

% of Total Loans		0.24	%		0.03	%		0.48	%		0.75	%		97.83	%		0.86	%		0.56	%		100	%

⁽¹⁾	The balances above include $371.1 million of acquired nonimpaired loans

Impaired Loans

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

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

Ending

Loans with

Contractual

Average

September 30, 2016

Loan

No Related

Related

Principal

Loan

(Dollars in thousands)

Balances

Reserve ⁽¹⁾

Reserve

Balances

Commercial

5,383

1,578

3,805

745

6,616

5,430

Owner-occupied commercial

4,153

2,510

1,643

4,340

2,827

Commercial mortgages

9,152

1,614

7,538

1,390

11,529

5,889

Construction

2,524

—

2,524

269

2,625

1,942

Residential

14,776

6,967

7,809

1,008

16,994

15,174

Consumer

8,105

6,791

1,314

201

9,922

7,856

Total (2)

44,093

19,460

24,633

3,635

52,026

39,118

⁽¹⁾	Reflects loan balances at or written down to their remaining book balance.

⁽²⁾	The above includes acquired impaired loans totaling $6.7 million in the ending loan balance and $7.8 million in the contractual principal balance.


December 31, 2015 (Dollars in thousands)	Ending Loan Balances		Loans with No Related Reserve⁽¹⁾		Loans with Related Reserve		Related Reserve		Contractual Principal Balances		Average Loan Balances
Commercial	$	6,137	$	951	$	5,186	$	1,168	$	20,206	$	9,391
Owner-occupied commercial		2,127		1,090		1,037		22		2,947		2,111
Commercial mortgages		4,652		3,410		1,242		103		11,826		7,540
Construction		1,419		—		1,419		211		1,419		1,448
Residential		15,710		9,034		6,676		920		18,655		15,264
Consumer		7,665		6,498		1,167		200		9,353		6,801

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

⁽¹⁾	Reflects loan balances at or written down to their remaining book balance.

⁽²⁾	The above includes acquired impaired loans totaling $2.9 million in the ending loan balance and $3.5 million in the contractual principal balance.

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

As of September 30, 2016, there were 27 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.9 million and $2.0 million, respectively. As of December 31, 2015, there were 32 residential loans and 3 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $5.0 million and $0.7 million, respectively.

Reserves on Acquired Nonimpaired Loans

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

Credit Quality Indicators

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

•

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

•

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

•

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

•

Doubtful. Borrowers have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.

•

Loss. Borrowers are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.

Residential and Consumer Loans

The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.

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

Commercial Credit Exposure


(Dollars in thousands)	Commercial				Owner-Occupied Commercial				Commercial Mortgages				Construction				Total Commercial⁽¹⁾
																	Sept. 30, 2016					Dec. 31, 2015
	Sept. 30, 2016		Dec. 31 2015		Sept. 30, 2016		Dec. 31 2015		Sept. 30, 2016		Dec. 31 2015		Sept. 30, 2016		Dec. 31 2015		Amount		%			Amount		%
Risk Rating:
Special mention	$	16,925	$	5,620	$	16,744	$	9,535	$	34,368	$	12,323	$	188	$	—	$	68,225				$	27,478
Substandard:
Accrual		28,630		33,883		18,941		22,901		11,170		2,547		2,011		8,296		60,752					67,627
Nonaccrual		3,253		4,164		2,510		1,090		5,822		3,326		—		—		11,585					8,580
Doubtful		692		1,164		—		—		1,264		—		—		—		1,956					1,164

Total Special and Substandard		49,500		44,831		38,195		33,526		52,624		18,196		2,199		8,296		142,518		4	%		104,849		3	%
Acquired impaired		9,691		12,985		10,673		4,688		12,880		10,513		3,592		3,544		36,836		1			31,730		1
Pass		1,207,526		1,003,781		1,008,777		842,429		1,088,399		937,989		203,185		233,933		3,507,887		95			3,018,132		96

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

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

Residential and Consumer Credit Exposure


(Dollars in thousands)	Residential				Consumer				Total Residential and Consumer⁽²⁾
	Sept. 30,		Dec. 31		Sept. 30,		Dec. 31		Sept. 30, 2016					Dec. 31, 2015
	2016		2015		2016		2015		Amount		Percent			Amount		Percent
Nonperforming(1)	$	13,957	$	15,548	$	8,105	$	7,664	$	22,062		3	%	$	23,212		4	%
Acquired impaired loans		899		950		368		7		1,267		—			957		—
Performing		253,855		243,181		429,685		352,578		683,540		97			595,759		96

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

⁽¹⁾	Includes $14.2 million as of September 30, 2016 and $13.6 million as of December 31, 2015 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest.

⁽²⁾	Total includes $164.8 million and $94.2 million in acquired nonimpaired loans as of September 30, 2016 and December 31, 2015, respectively.

Troubled Debt Restructurings (TDR)

TDRs are recorded in accordance with FASB ASC 310-40, Troubled Debt Restructuring by Creditors (ASC 310-40). The balance of TDRs at September 30, 2016 and December 31, 2015 was $22.0 million and $24.6 million, respectively. The balance at September 30, 2016 included approximately $7.8 million of TDRs in nonaccrual status and $14.2 million of TDRs in accrual status compared to $11.0 million in nonaccrual status and $13.6 million in accrual status at December 31, 2015. Approximately $1.8 million and $2.1 million in related reserves have been established for these loans at September 30, 2016 and December 31, 2015, respectively.

During the nine months ended September 30, 2016, the terms of 20 loans were modified in TDRs. Twelve modifications were for consumer loans of which ten were HELOC conversions and two loans were discharged in bankruptcy. Six were residential mortgages; three received rate reduction and maturity date extension, two received forbearance agreements and one residential mortgage was discharged in bankruptcy. One commercial loan in bankruptcy was granted interest-only payments and one commercial loan was granted a maturity date extension. Our concessions on restructured loans typically consist of forbearance agreements, reduction in interest rates or extensions of maturities. Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, typically six months and payment is reasonably assured.

The following table presents loans identified as TDRs during the three and nine months ended September 30, 2016 and 2015.


(Dollars in thousands)	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Commercial	$	—	$	—	$	1,125	$	—
Owner Occupied Commercial		—		—		—		577
Commercial mortgages		—		—		—		—
Construction		—		—		—		—
Residential		797		38		1,523		447
Consumer		278		643		733		1,306

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

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

7. REVERSE MORTGAGE LOANS

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

Our investment in reverse mortgages totaled $23.1 million at September 30, 2016. The portfolio consists of 80 loans with an average borrowers’ age of 94 years old and there is currently significant overcollateralization in the portfolio, as the realizable collateral value (the lower of collectible principal and interest, or appraised value and annual broker price opinion of the home) of $42.1 million exceeds the outstanding book balance at September 30, 2016. Broker price opinions are updated at least annually. Additional broker price opinions are obtained when our quarterly review indicates that a home’s value has increased or decreased by at least 50% during any given period.

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

To determine the carrying value of these reverse mortgages as of September 30, 2016, we used the proprietary model described above and actual cash flow information to estimate future cash flows. There are three main drivers of cash flows; 1) move-out rates, 2) house price appreciation (HPA) forecasts, and 3) internal rate of return.

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

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

Internal Rate of Return – As of September 30, 2016, the internal rate of return (IRR) of 19.49% was the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is expected to be liquidated.

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


(Dollars in thousands)
Year Ending
2016	$	266
2017		433
2018		341
2019		265
2020		204
Years 2021 - 2025		471
Years 2026 - 2030		95
Years 2031 - 2035		14
Thereafter		2

Total ⁽¹⁾	$	2,091

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

The amount of the contract value that would be forfeited if we were not to make cash payments to reverse mortgagors in the future is $6.4 million.

The future cash flows depend on the HPA assumptions. If the future changes in collateral value were assumed to be zero, income would decrease by $0.7 million for the quarter ended September 30, 2016 with an IRR of 18.76%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $0.3 million with an IRR of 19.16%.

The net present value of the projected cash flows depends on the IRR used. If the IRR increased by 1%, the net present value would increase by $1.2 million. If the IRR decreased by 1%, the net present value would decrease by $1.2 million.

8. GOODWILL AND INTANGIBLES

In accordance with FASB ASC 805, Business Combinations (ASC 805) and FASB ASC 350, Intangibles-Goodwill and Other (ASC 350), all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value.

During the nine months ended September 30, 2016, we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

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


	WSFS			Cash		Wealth		Consolidated
(Dollars in thousands)	Bank			Connect		Management		Company
December 31, 2015	$	80,078		$	—	$	5,134	$	85,212
Changes in goodwill		(1,496	)		—		—		(1,496	)
Goodwill from business combinations		65,206			—		6,514		71,720

September 30, 2016	$	143,788		$	—	$	11,648	$	155,436

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

The following table summarizes other intangible assets:


	Gross					Net
(Dollars in thousands)	Intangible		Accumulated			Intangible
	Assets		Amortization			Assets
September 30, 2016
Core deposits	$	13,128		(5,344	)	$	7,784
Customer relationships		11,105		(2,511	)		8,594
Non-compete agreements		604		(374	)		230
Mortgage servicing rights		1,518		(1,034	)		484
Favorable lease asset		195		(14	)		181

Total intangible assets	$	26,550	$	(9,277	)	$	17,273

December 31, 2015
Core deposits	$	10,246		(4,512	)	$	5,734
Customer relationships		5,495		(2,028	)		3,467
Non-compete agreements		511		(110	)		401
Mortgage servicing rights		1,430		(949	)		481

Total intangible assets	$	17,682	$	(7,599	)	$	10,083

Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits and either accelerated or straight-line methods of amortization. During the nine months ended September 30, 2016, we recognized amortization expense on other intangible assets of $1.3 million.

The following presents the estimated amortization expense of intangibles:


(Dollars in thousands)	Amortization of Intangibles
Remaining in 2016	$	641
2017		2,295
2018		2,132
2019		2,063
2020		1,868
Thereafter		8,274

Total	$	17,273

9. ASSOCIATE BENEFIT PLANS

Postretirement Benefits

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

We account for our obligations under the provisions of FASB ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active working career. Amortization of unrecognized net gains or losses resulting from experience different from that assumed and from changes in assumptions is included as a component of net periodic benefit cost over the remaining service period of active employees to the extent that such gains and losses exceed 10% of the accumulated postretirement benefit obligation, as of the beginning of the year.

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


	Three months ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2016			2015			2016			2015
Service cost	$	14		$	15		$	43		$	44
Interest cost		19			22			57			66
Prior service cost amortization		(18	)		(19	)		(44	)		(57	)
Net gain recognition		(16	)		(5	)		(47	)		(15	)

Net periodic benefit cost	$	(1	)	$	13		$	9		$	38

10. INCOME TAXES

We account for income taxes in accordance with FASB ASC 740, Income Taxes (ASC 740). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.

ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.

There were no unrecognized tax benefits as of September 30, 2016. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2013 through 2015 tax years are subject to examination as of September 30, 2016. Pennsylvania is currently auditing our 2012 and 2013 state tax returns. We do not expect to record or realize any material unrecognized tax benefits during 2016.

As a result of the adoption of ASU No. 2014-01, “Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects,” the amortization of our low-income housing credit investments has been reflected as income tax expense. Accordingly, $0.4 million and $1.2 million of such amortization has been reflected as income tax expense for the three and nine months ended September 30, 2016, respectively, compared to $0.5 million and $1.4 million for the same periods in 2015.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the nine months ended September 30, 2016 were $1.2 million, $1.2 million and $0.3 million, respectively. The carrying value of the investment in affordable housing credits is $10.8 million at September 30, 2016, compared to $12.0 million at December 31, 2015.

11. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

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

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

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


(Dollars in thousands) September 30, 2016	Quoted Prices in Active Markets for Identical Asset (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets measured at fair value on a recurring basis
Available-for-sale securities:
CMO	$	—	$	264,741	$	—	$	264,741
FNMA MBS		—		380,291		—		380,291
FHLMC MBS		—		68,172		—		68,172
GNMA MBS		—		28,868		—		28,868
GSE		—		35,136		—		35,136
Other investments		627		—		—		627

Total assets measured at fair value on a recurring basis	$	627	$	777,208	$	—	$	777,835
Assets measured at fair value on a nonrecurring basis
Other real estate owned	$	—	$	—	$	3,232	$	3,232
Loans held-for-sale		—		61,198		—		61,198
Impaired loans, net		—		—		40,458		40,458

Total assets measured at fair value on a nonrecurring basis	$	—	$	61,198	$	43,690	$	104,888


(Dollars in thousands) December 31, 2015	Quoted Prices in Active Markets for Identical Asset (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets measured at fair value on a recurring basis
Available-for-sale securities:
CMO	$	—	$	251,488	$	—	$	251,488
FNMA MBS		—		318,471		—		318,471
FHLMC MBS		—		99,442		—		99,442
GNMA MBA		—		20,714		—		20,714
GSE				30,914		—		30,914

Total assets measured at fair value on a recurring basis	$	—	$	721,029	$	—	$	721,029
Assets measured at fair value on a nonrecurring basis
Other real estate owned	$	—	$	—	$	5,080	$	5,080
Loans held-for sale		—		41,807		—		41,807
Impaired loans (collateral dependent)		—		—		35,086		35,086

Total assets measured at fair value on a nonrecurring basis	$	—	$	41,807	$	40,166	$	81,973

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ending September 30, 2016 and no material liabilities measured at fair value as of September 30, 2016 and December 31, 2015.

Fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available-for-sale securities

As of September 30, 2016, securities classified as available-for-sale are reported at fair value using Level 2 inputs, except for one mutual fund asset related to the Penn Liberty acquisition, which is categorized as Level 1. Included in the Level 2 total are approximately $35.1 million in U.S. Treasury Notes and Federal Agency debentures, and $742.1 million in Federal Agency MBS. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

Other real estate owned

Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.

Loans held for sale

The fair value of our loans held for sale is based upon estimates using Level 2 inputs. These inputs are based upon pricing information obtained from secondary markets and brokers and applied to loans with similar interest rates and maturities.

Impaired loans

We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans has a gross amount of $44.1 million and $37.7 million at September 30, 2016 and December 31, 2015, respectively. The valuation allowance on impaired loans was $3.6 million as of September 30, 2016 and $2.6 million as of December 31, 2015.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Cash and cash equivalents

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

Investment securities

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

Loans held for sale

Loans held for sale are carried at their fair value (see discussion in “Fair Value of Financial Assets and Liabilities” section above).

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, owner-occupied commercial construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.

Reverse mortgage loans

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

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

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

Other assets

Other assets includes, among others, other real estate owned (see discussion earlier in this note) and our investment in Visa Class B stock. Our ownership includes shares acquired at no cost from our prior participation in Visa’s network, while Visa operated as a cooperative. During 2015 and 2016 we purchased additional shares which are accounted for as non-marketable equity securities and carried at cost. We evaluated the shares carried at cost for OTTI as of September 30, 2016, and the evaluation showed no OTTI as of September 30, 2016. Following resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares.

While only current owners of Class B shares are allowed to purchase other Class B shares, there have been several transactions between Class B shareholders. Based on these transactions we estimate the value of our Class B shares to be $13.3 million as of September 30, 2016.

Deposits

The fair value deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.

Borrowed funds

Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Off-balance sheet instruments

The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either us or the borrower, they only have value to us and the borrower.

The book value and estimated fair value of our financial instruments are as follows:

(Dollars in thousands)

Fair Value

September 30, 2016

December 31, 2015

Measurement

Book Value

Fair Value

Book Value

Fair Value

Financial assets:

Cash and cash equivalents

Level 1

813,405

561,179

Investment securities available-for-sale

Level 2

777,835

721,029

Investment securities held-to-maturity

Level 2

164,880

169,562

165,862

167,743

Loans, held-for-sale

Level 2

61,198

41,807

Loans, net⁽¹⁾

Level 2

4,306,569

4,283,862

3,693,964

3,637,714

Impaired loans, net

Level 3

40,458

35,086

Reverse mortgage loans

Level 3

23,120

24,284

Stock in FHLB of Pittsburgh

Level 2

36,710

30,519

Accrued interest receivable

Level 2

15,257

14,040

Other assets

Level 3

7,277

16,625

8,669

18,416

Financial liabilities:

Deposits

Level 2

4,733,639

4,528,014

4,016,566

3,791,606

Borrowed funds

Level 2

1,144,707

1,143,498

932,886

933,905

Standby letters of credit

Level 3

284

195

Accrued interest payable

Level 2

3,658

801

⁽¹⁾	Excludes impaired loans, net.

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

12. SEGMENT INFORMATION

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

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

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

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through four business lines. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC is a registered investment advisor. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and current income. Christiana Trust provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy administration, custodial and commercial domicile services to corporate and institutional clients. WSFS Private Banking serves high net worth clients by delivering credit and deposit products and partnering with other business units to deliver investment management and fiduciary products and services.

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

Three months ended September 30, 2016

(Dollars in thousands)

WSFS Bank

Cash
Connect

Wealth
Management

Total

Statement of Operations

External customer revenues:

Interest income

53,332

—

2,005

55,337

Noninterest income

11,957

8,632

6,260

26,849

Total external customer revenues

65,289

8,632

8,265

82,186

Inter-segment revenues:

Interest income

1,302

—

1,698

3,000

Noninterest income

2,140

229

2,396

Total inter-segment revenues

3,442

229

1,725

5,396

Total revenue

68,731

8,861

9,990

87,582

External customer expenses:

Interest expense

6,113

—

203

6,316

Noninterest expenses

40,991

5,006

4,500

50,497

Provision for loan losses

5,669

—

159

5,828

Total external customer expenses

52,773

5,006

4,862

62,641

Inter-segment expenses:

Interest expense

1,698

790

512

3,000

Noninterest expenses

256

744

1,396

2,396

Total inter-segment expenses

1,954

1,534

1,908

5,396

Total expenses

54,727

6,540

6,770

68,037

Income before taxes

14,004

2,321

3,220

19,545

Income tax provision

6,823

Consolidated net income

12,722

Capital expenditures

10,900

248

11,159

As of September 30, 2016:

Statement of Condition

Cash and cash equivalents

99,298

712,209

1,898

813,405

Goodwill

143,788

—

11,648

155,436

Other segment assets

5,499,725

2,599

156,428

5,658,752

Total segment assets

5,742,811

714,808

169,974

6,627,593


	Three months ended September 30, 2015
(Dollars in thousands)
	WSFS Bank		Cash Connect		Wealth Management		Total
Statement of Operations
External customer revenues:
Interest income	$	42,873	$	—	$	1,984	$	44,857
Noninterest income		8,944		7,138		5,583		21,665

Total external customer revenues		51,817		7,138		7,567		66,522

Inter-segment revenues:
Interest income		879		—		1,697		2,576
Noninterest income		2,028		219		26		2,273

Total inter-segment revenues		2,907		219		1,723		4,849

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

External customer expenses:
Interest expense		3,688		—		172		3,860
Noninterest expenses		30,066		4,255		4,384		38,705
Provision for loan losses		1,345		—		108		1,453

Total external customer expenses		35,099		4,255		4,664		44,018

Inter-segment expenses
Interest expense		1,697		394		485		2,576
Noninterest expenses		245		624		1,404		2,273

Total inter-segment expenses		1,942		1,018		1,889		4,849

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

Income before taxes	$	17,683	$	2,084	$	2,737	$	22,504
Income tax provision								8,078

Consolidated net income								14,426

Capital expenditures ⁽¹⁾	$	1,663	$	429	$	5	$	2,097
As of December 31, 2015:
Statement of Condition
Cash and cash equivalents	$	65,663	$	493,165	$	2,351	$	561,179
Goodwill		80,078		—		5,134		85,212
Other segment assets		4,745,670		—		192,576		4,938,246

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

⁽¹⁾

Capital expenditures amounts have been adjusted to correct errors that were not material to our Form 10-Q for the quarterly period ended September 30, 2015. Previously reported capital expenditures were $3.5 million for WSFS Bank, $1.5 million for Cash Connect, $0.1 million for Wealth Management, and $5.0 million for Total Consolidated Company.

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

Nine months ended September 30, 2016

(Dollars in thousands)

WSFS Bank

Cash
Connect

Wealth
Management

Total

Statement of Operations

External customer revenues:

Interest income

150,862

—

6,024

156,886

Noninterest income

31,982

24,443

18,343

74,768

Total external customer revenues

182,844

24,443

24,367

231,654

Inter-segment revenues:

Interest income

3,498

—

5,245

8,743

Noninterest income

6,211

632

6,919

Total inter-segment revenues

9,709

632

5,321

15,662

Total revenue

192,553

25,075

29,688

247,316

External customer expenses:

Interest expense

15,506

—

589

16,095

Noninterest expenses

109,265

14,687

13,771

137,723

Provision for loan losses

7,675

—

187

7,862

Total external customer expenses

132,446

14,687

14,547

161,680

Inter-segment expenses:

Interest expense

5,245

1,973

1,525

8,743

Noninterest expenses

708

2,186

4,025

6,919

Total inter-segment expenses

5,953

4,159

5,550

15,662

Total expenses

138,399

18,846

20,097

177,342

Income before taxes

54,154

6,229

9,591

69,974

Income tax provision

24,004

Consolidated net income

45,970

Capital expenditures

14,346

672

15,037

As of September 30, 2016:

Statement of Condition

Cash and cash equivalents

99,298

712,209

1,898

813,405

Goodwill

143,788

—

11,648

155,436

Other segment assets

5,499,725

2,599

156,428

5,658,752

Total segment assets

5,742,811

714,808

169,974

6,627,593


	Nine months ended September 30, 2015
(Dollars in thousands)	WSFS Bank		Cash Connect		Wealth Management		Total
Statement of Operations
External customer revenues:
Interest income	$	124,739	$	—	$	6,024	$	130,763
Noninterest income		27,615		20,845		16,758		65,218

Total external customer revenues		152,354		20,845		22,782		195,981

Inter-segment revenues:
Interest income		2,626		—		4,782		7,408
Noninterest income		5,810		601		73		6,484

Total inter-segment revenues		8,436		601		4,855		13,892

Total revenue		160,790		21,446		27,637		209,873

External customer expenses:
Interest expense		11,422		—		437		11,859
Noninterest expenses		91,066		12,780		12,426		116,272
Provision for loan losses		5,688		—		324		6,012

Total external customer expenses		108,176		12,780		13,187		134,143

Inter-segment expenses:
Interest expense		4,782		1,156		1,470		7,408
Noninterest expenses		674		1,882		3,928		6,484

Total inter-segment expenses		5,456		3,038		5,398		13,892

Total expenses		113,632		15,818		18,585		148,035

Income before taxes	$	47,158	$	5,628	$	9,052	$	61,838
Income tax provision								22,289

Consolidated net income							$	39,549

Capital expenditures ⁽¹⁾	$	3,243	$	1,650	$	20	$	4,913
As of December 31, 2015:
Statement of Condition
Cash and cash equivalents	$	65,663	$	493,165	$	2,351	$	561,179
Goodwill		80,078		—		5,134		85,212
Other segment assets		4,745,670		—		192,576		4,938,246

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

⁽¹⁾

Capital expenditures amounts have been adjusted to correct errors that were not material to our Form 10-Q for the nine month period ended September 30, 2015. Previously reported capital expenditures were $4.6 million for WSFS Bank, $4.0 million for Cash Connect, $0.1 million for Wealth Management, and $8.7 million for Total Consolidated Company.

13. INDEMNIFICATIONS AND GUARANTEES

Secondary Market Loan Sales

Given the current interest rate environment, coupled with our desire not to hold newly originated residential mortgage loans in our portfolio, we generally sell these assets in the secondary market to mortgage loan aggregators, and on a more limited basis, to GSEs such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on our unaudited Consolidated Statements of Condition at fair value with changes in the value reflected in our unaudited Consolidated Statements of Cash Flows and Comprehensive Income. Gains and losses are recognized at the time of sale. We periodically retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in our intangible assets in our unaudited Consolidated Statements of Condition. Otherwise, we sell loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that we intend to sell in the secondary market are accounted for as derivatives under the guidance in FASB ASC Topic 815, Derivatives and Hedging (ASC 815).

We generally do not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were no such repurchases for the nine months ended September 30, 2016.

Swap Guarantees

We entered into agreements with three unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows smaller financial institutions like us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives under ASC 815.

At September 30, 2016 there were 130 variable-rate to fixed-rate swap transactions between the third party financial institutions and our customers, compared to 119 at December 31, 2015. The initial notional aggregate amount was approximately $498.6 million at September 30, 2016 compared to $481.6 million at December 31, 2015. At September 30, 2016 maturities ranged from one month to over 19 years. The aggregate market value of these swaps to the customers was a liability of $27.2 million at September 30, 2016 and $18.1 million at December 31, 2015. There were no reserves for the swap guarantees as of September 30, 2016.

14. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME

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

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


(Dollars in thousands)	Net change in investment securities available-for-sale			Net change in securities held-to- maturity			Net change in defined benefit plan			Net Change in Fair Value of Derivative Used for Cash Flow Hedge		Total
Balance, June 30, 2016	$	12,841		$	1,592		$	1,244		$	—	$	15,677
Other comprehensive income before reclassifications		(1,112	)		—			—			61		(1,051	)
Plus (less): Net amounts reclassified to/from accumulated other comprehensive income		(645	)		(102	)		(20	)		—		(767	)

Net current-period other comprehensive income (loss)		(1,757	)		(102	)		(20	)		61		(1,818	)

Balance, September 30, 2016	$	11,084		$	1,490		$	1,224		$	61	$	13,859

Balance, June 30, 2015	$	(1,587	)	$	1,999		$	817		$	—	$	1,229
Other comprehensive loss before reclassifications		6,178			—			—			—		6,178
Plus (less): Net amounts reclassified to/from accumulated other comprehensive income		(47	)		(104	)		(15	)		—		(166	)

Net current-period other comprehensive (loss) income		6,131			(104	)		(15	)		—		6,012

Balance, September 30, 2015	$	4,544		$	1,895		$	802		$	—	$	7,241


(Dollars in thousands)	Net change in investment securities available-for-sale			Net change in securities held-to- maturity			Net change in defined benefit plan			Net Change in Fair Value of Derivative Used for Cash Flow Hedge		Total
Balance, December 31, 2015	$	(1,887	)	$	1,795		$	788		$	—	$	696
Other comprehensive income before reclassifications		14,143			—			—			61		14,204
Plus (less): Net amounts reclassified to/from accumulated other comprehensive income		(1,172	)		(305	)		436			—		(1,041	)

Net current-period other comprehensive income (loss)		12,971			(305	)		436			61		13,163

Balance, September 30, 2016	$	11,084		$	1,490		$	1,224		$	61	$	13,859

Balance, December 31, 2014	$	446		$	2,207		$	847		$	—	$	3,500
Other comprehensive income before reclassifications		4,721			—			—			—		4,721
Plus (less): Net amounts reclassified to/from accumulated other comprehensive income		(623	)		(312	)		(45	)		—		(980	)

Net current-period other comprehensive income (loss)		4,098			(312	)		(45	)		—		3,741

Balance, September 30, 2015	$	4,544		$	1,895		$	802		$	—	$	7,241

The Consolidated Statements of Operations were impacted by components of other comprehensive income as shown in the table below:


	Three Months Ended						Affected line item in Consolidated Statements of Operations
(Dollars in thousands)	September 30,
	2016			2015
Securities available-for-sale:
Realized gains on securities transactions	$	(1,040	)	$	(76	)	Security gains, net
Income taxes		395			29		Income tax provision

Net of tax	$	(645	)	$	(47	)

Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
Amortization of net unrealized gains to income during the period	$	(162	)	$	(159	)	Interest income on investment securities
Income taxes		60			55		Income tax provision

Net of tax	$	(102	)	$	(104	)

Amortization of Defined Benefit Pension items:
Prior service (credits) costs	$	(18	)	$	(19	)
Transition obligation		—			—
Actuarial losses (gains)		(16	)		(5	)

Total before tax	$	(34	)	$	(24	)	Salaries, benefits and other compensation
Income taxes		14			9		Income tax provision

Net of tax		(20	)		(15	)

Total reclassifications	$	(767	)	$	(166	)


	Nine Months Ended						Affected line item in Consolidated Statements of Operations
	September 30,
	2016			2015
Securities available-for-sale:
Realized gains on securities transactions	$	(1,890	)	$	(1,004	)	Security gains, net
Income taxes		718			381		Income tax provision

Net of tax	$	(1,172	)	$	(623	)

Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
Amortization of net unrealized gains to income during the period	$	(492	)	$	(487	)	Interest income on investment securities
Income taxes		187			175		Income tax provision

Net of tax	$	(305	)	$	(312	)

Amortization of Defined Benefit Pension items:
Prior service (credits) costs	$	(44	)	$	(57	)
Transition obligation		—			—
Actuarial (gains) losses		746			(15	)

Total before tax	$	702		$	(72	)	Salaries, benefits and other compensation
Income taxes		(266	)		27		Income tax provision

Net of tax	$	436		$	(45	)

Total reclassifications	$	(1,041	)	$	(980	)

15. LEGAL AND OTHER PROCEEDINGS

As we disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, a tentative settlement was reached in the litigation captioned Goldstein v. Wilmington Savings Fund Society, FSB (In re: Universal Marketing, Inc.), Chapter 7, Case No. 09-15404 (ELF), Adv. Pro. No. 11-00512 (Bkcy. E. D. PA). The settlement has since been approved by the court, and the case has been dismissed.

From time to time we are brought into certain legal matters and/or disputes through our Wealth Management segment, as a result of sometimes highly complex documents and servicing requirements that are part of this business. While the outcomes carry some degree of uncertainty, management does not currently anticipate that the ultimate liability, if any, arising out of such other proceedings we are aware of, will have a material effect on the Consolidated Financial Statements.

There were no material changes or additions to other significant pending legal or other proceedings involving us other than those arising out of routine operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by the Company’s subsidiary, Wilmington Savings Fund Society, FSB, or WSFS Bank, one of the ten oldest bank and trust companies continuously operating under the same name in the United States. At $6.6 billion in assets and $14.3 billion in fiduciary assets, WSFS Bank is also the largest bank and trust company headquartered in the Delaware Valley. As a federal savings bank, which was formerly chartered as a state mutual savings bank, the Bank enjoys broader fiduciary powers than most other types of financial institutions. A fixture in the community, the Bank has been in operation for more than 184 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remains a leader in our community. We are a relationship-focused, locally-managed, community banking institution. We state our mission simply: “We Stand for Service.” Our strategy of “Engaged Associates delivering Stellar Experiences growing Customer Advocates and value for our Owners” focuses on exceeding customer expectations, delivering stellar service and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $3.7 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering the high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits. As of September 30, 2016, we service our customers primarily from our 76 offices located in Delaware (46), Pennsylvania (28), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches, and mortgage and title services through those branches and through Pennsylvania-based WSFS Mortgage. WSFS Mortgage is a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions.

On 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 grow 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 in the Notes to the Consolidated Financial Statements for further information.

On October 17, 2016, we acquired the assets of West Capital Management, an independent, fee-only wealth management firm operating under a multi-family office philosophy. This acquisition aligns with our strategic plan to expand our wealth management offerings and to diversity our fee-income generating business.

The Cash Connect segment is a premier provider of ATM vault cash and smart safe and cash logistics in the United States. It manages over $891 million in vault cash in over 20,000 non-bank ATMs nationwide and provides related services such as online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing equipment sales and deposit safe cash logistics. Cash Connect also operates 447 ATMs for the Bank, which has the largest branded ATM network in Delaware.

As a provider of ATM vault cash to the U.S. ATM industry, Cash Connect is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 16-year history, Cash Connect periodically has been exposed to losses through theft from armored courier companies and consistently has been able to recover losses through its risk management strategies.

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through four businesses. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress is a registered investment advisor with approximately $683 million in assets under management. Cypress’ primary market segment is high net worth individuals and offers a ‘balanced’ investment style focused on preservation of capital and providing for current income. Christiana Trust, with $13.6 billion in assets under management and administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, custodial and commercial domicile services to corporate and institutional clients. WSFS Private Banking serves high net worth clients by delivering credit and deposit products and partnering with other business units to deliver investment management and fiduciary products and services.

As a provider of trust services to our clients, we are exposed to operational, reputational and legal risks due to the inherent complexity of the trust business. To mitigate these risks, we rely on the hiring, development and retention of experienced Associates, financial controls, managerial oversight, and other risk management practices. Also, from time to time our trust business may give rise to disputes with clients and we may be exposed to litigation which could result in significant costs. The ultimate outcome of any litigation is uncertain.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could” or “may”, or by variations of such words or by similar expressions. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the market areas in which the Company operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; the Company’s level of nonperforming assets and the costs associated with resolving any problem loans including litigation and other costs; changes in market interest rates may increase funding costs and reduce earning asset yields thus reducing margin; the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio; the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in our loan portfolio; the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations including the changes in regulations affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations being issued in accordance with this statute and potential expenses associated with complying with such regulations; possible additional loan losses and impairment of the collectability of loans; the Company’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms; possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations; any impairment of the Company’s goodwill or other intangible assets; failure of the financial and operational controls of the Company’s Cash Connect division; conditions in the financial markets that may limit the Company’s access to additional funding to meet its liquidity needs; the success of the Company’s growth plans, including the successful integration of past and future acquisitions; difficulties and delays in integrating the Penn Liberty business or fully realizing cost savings and other benefits of the merger, business disruption following the merger, Penn Liberty’s customer acceptance of the Company’s products and services and related customer disintermediation; negative perceptions or publicity with respect to the Company’s trust and wealth management business; system failure or cybersecurity breaches of the Company’s network security; the Company’s ability to recruit and retain key employees; the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally; the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks; possible changes in the speed of loan prepayments by the Company’s customers and loan origination or sales volumes; possible acceleration of prepayments of mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on prepayments on mortgage-backed securities due to low interest rates; regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its shareholders; the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2015 and other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

The preparation of the unaudited Consolidated Financial Statements in accordance with U.S. GAAP, requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those used to determine the allowance for loan losses, investment in reverse mortgages, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2016, it is possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

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

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $1.0 billion, or 19%, to $6.6 billion during the nine months ended September 30, 2016. Net loans increased $618.0 million, or 17%, primarily due to organic and acquisition-related growth in our loan portfolio. Cash and cash equivalents increased $252.2 million, or 45%, primarily due to higher cash in non-owned ATMs reflecting the growth of our Cash Connect segment. Goodwill increased $70.2 million, or 82% and intangible assets increased $7.2 million, or 71%, both as a result of our acquisition activity. Investment securities increased $55.8 million, or 6%, which was primarily due to net purchases of $36.4 million of available for sale securities during the nine months ended September 30, 2016 as well as a $20.9 million increase in unrealized gains on the portfolio in comparison with December 31, 2015, reflecting a decline in interest rates.

Total liabilities increased $931.4 million, or 19%, to $5.9 billion during the nine months ended September 30, 2016. Deposits increased $717.1 million, or 18%, primarily due to our acquisition of Penn Liberty. FHLB advances, used to finance our organic and acquisition-related growth, increased $147.7 million, or 22%, which was partially offset by a decrease of $47.2 million, or 37% in fed funds and repurchase agreements. The $98.2 million, or greater than 100%, increase in senior debt reflects our issuance of $100.0 million of senior notes during the second quarter of 2016.

Capital Resources

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

During the second quarter of 2016, WSFS issued $100.0 million in aggregate principal amount of 4.50% fixed-to-floating rate senior notes due 2026. The Company intends to use the net proceeds from the offering for general corporate purposes, including financing organic growth, acquisitions, repurchases of common stock and redemption of outstanding indebtedness.

In the third quarter of 2016, WSFS repurchased 50,000 shares of common stock at an average price of $37.13 as part of our 5% buyback program approved by the Board of Directors during the fourth quarter of 2015. WSFS has 991,194 shares, or over 3% of outstanding shares, remaining to repurchase under this authorization.

Stockholders’ equity increased $111.5 million between December 31, 2015 and September 30, 2016. This increase was primarily due to the issuance of 1,806,748 shares of stock related to the Penn Liberty acquisition, which increased stockholder’s equity by $66.8 million, as well as net income for the nine months ended September 30, 2016 of $46.0 million, partially offset by the payment of common stock dividends and stock buybacks during the quarter.

Below is a table comparing the Bank and the Company’s consolidated capital position to the minimum regulatory requirements as of September 30, 2016:


	Consolidated Bank Capital					For Capital Adequacy Purposes					To be Well-Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Total Capital (to Risk-Weighted Assets)
Wilmington Savings Fund Society, FSB	$	646,505		11.88	%	$	435,500		8.00	%	$	544,375		10.00	%
WSFS Financial Corporation		622,339		11.42			436,128		8.00			545,160		10.00
Tier 1 Capital (to Risk-Weighted Assets)
Wilmington Savings Fund Society, FSB		606,688		11.14			326,625		6.00			435,500		8.00
WSFS Financial Corporation		582,604		10.69			327,096		6.00			436,128		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Wilmington Savings Fund Society, FSB		606,688		11.14			244,969		4.50			353,844		6.50
WSFS Financial Corporation		517,760		9.50			245,322		4.50			354,354		6.50
Tier 1 Leverage Capital
Wilmington Savings Fund Society, FSB		606,688		10.05			241,469		4.00			301,836		5.00
WSFS Financial Corporation		582,604		9.66			241,329		4.00			301,661		5.00

Book value per share of common stock was $22.08 at September 30, 2016, an increase of $2.58, or 13% from $19.50 at December 31, 2015. Tangible common book value per share of common stock (a non-GAAP financial measure) was $16.57 at September 30, 2016, a decrease of $0.27, or 2%, from $16.30 at December 31, 2015. For a reconciliation of tangible common book value per share to book value per share in accordance with GAAP, see Reconciliation of Non-GAAP Measurement to GAAP.

Regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which include leveraged and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

Regulatory capital requirements for the Bank and the Company include a minimum common equity Tier 1 capital ratio of 4.50% of risk-weighted assets, a Tier 1 capital ratio of 6.00% of risk-weighted assets, a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets.

Not included in the Bank’s capital, the Company separately held $121.0 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.

As of September 30, 2016, the Bank and the Company were in compliance with regulatory capital requirements and exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

Liquidity

We manage our liquidity and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.

We have ready access to several sources to fund growth and meet our liquidity needs. Among these are: net income, retail deposit programs, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities and government sponsored enterprises notes, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to maintain required and prudent levels of liquidity.

During the nine months ended September 30, 2016, cash and cash equivalents increased $252.2 million to $813.4 million from $561.2 million as of December 31, 2015. Cash provided by operating activities was $55.5 million, reflecting the cash impact of our operations for the nine months ended September 30, 2016. Cash used by investing activities was $136.6 million, primarily due to increased lending of $146.5 million and net purchases of available-for-sale investment securities of $36.4 million, partially offset by net cash received from acquisitions of $51.8 million. Cash provided by financing activities was $333.4 million, primarily reflecting increases in cash of $151.9 million from net increases in organic deposit balances, $147.7 million from net FHLB borrowings to finance our organic and acquisition-related growth and $97.9 million from our issuance of senior debt during the second quarter of 2016. These increases were partially offset by $47.2 million used for repayment of fed fund borrowings as well as $12.9 million used to purchase treasury stock.

NONPERFORMING ASSETS

Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.

The following table shows our nonperforming assets and past due loans at the dates indicated:


(In Thousands)	September 30, 2016			December 31, 2015
Nonaccruing loans:
Commercial	$	3,945		$	5,328
Owner-occupied commercial		2,510			1,091
Consumer		4,151			4,133
Commercial mortgages		7,086			3,326
Residential mortgages		5,480			7,287
Construction		—			—

Total nonaccruing loans		23,172			21,165
Assets acquired through foreclosure		3,232			5,080
Troubled debt restructuring (accruing)		14,182			13,647

Total nonperforming assets	$	40,586		$	39,892

Past due loans:⁽¹⁾
Residential mortgages	$	—		$	251
Consumer		271			252
Commercial and commercial mortgages		—			17,529

Total past due loans	$	271		$	18,032

Ratio of allowance for loan losses to total loans ⁽²⁾		0.89	%		0.98	%
Ratio of nonaccruing loans to total loans ⁽²⁾		0.53			0.56
Ratio of nonperforming assets to total assets		0.61			0.71
Ratio of loan loss allowance to nonaccruing loans		168.43			175.27
Ratio of loan loss allowance to total nonperforming assets		0.96			0.93

⁽¹⁾	Accruing loans only which includes acquired nonimpaired loans. Nonaccruing TDRs are included in their respective categories of nonaccruing loans.

⁽²⁾	Total loans exclude loans held for sale.

Nonperforming assets increased $0.7 million between December 31, 2015 and September 30, 2016. However, due to an increase in total assets, nonperforming assets as a percentage of total assets decreased from 0.71% at December 31, 2015 to 0.61% at September 30, 2016.

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


	For the Nine			For the Year
	Months Ended			Ended
(Dollars in thousands)	September 30, 2016			December 31, 2015
Beginning balance	$	39,892		$	52,385
Additions		32,918			12,897
Collections		(23,950	)		(14,167	)
Transfers to accrual		(681	)		(95	)
Charge-offs, net		(7,593	)		(11,128	)

Ending balance	$	40,586		$	39,892

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Problem loans are all criticized, classified and nonperforming loans and other real estate owned. Timely identification enables us to take appropriate action and, accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system utilizes guidelines established by federal regulation.

INTEREST RATE SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At September 30, 2016, interest-earning liabilities exceeded interest-bearing assets that mature or reprice within one year (interest-sensitive gap) by $155.1 million. Our interest-sensitive liabilities as a percentage of interest-sensitive assets within the one-year window decreased from 103.9% at December 31, 2015 to 95.2% at September 30, 2016. Likewise, the one-year interest-sensitive gap as a percentage of total assets decreased to (2.34%) at September 30, 2016 from 1.96% at December 31, 2015. The low rate level of sensitivity reflects our continuing efforts to effectively manage interest rate risk.

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, required to be performed by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.

The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at September 30, 2016 and December 31, 2015:


September 30, 2016			December 31, 2015
% Change in Interest Rate (Basis Points)	% Change in Net Interest Margin ⁽¹⁾	Economic Value of Equity ⁽²⁾	% Change in Net Interest Margin ⁽¹⁾	Economic Value of Equity⁽²⁾
+300	4%	14.35%	6%	13.96%
+200	2%	14.22%	3%	13.99%
+100	-%	13.84%	-%	13.81%
-	-%	13.26%	-%	13.56%
-100	-%	12.09%	-1%	12.72%
-200 ⁽³⁾	NMF	NMF	NMF	NMF
-300 ⁽³⁾	NMF	NMF	NMF	NMF

⁽¹⁾	The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.

⁽²⁾	The economic value of equity ratio of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.

⁽³⁾	Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates at that time.

We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

Results of Operations

We recorded net income of $12.7 million, or $0.41 per diluted common share, for the three months ended September 30, 2016, a $1.7 million, or 12% decrease from $14.4 million, or $0.51 per share, for the three months ended September 30, 2015. Corporate development expenses increased $5.0 million in comparison with the three months ended September 30, 2015, primarily due to our acquisitions of Penn Liberty and Powdermill. Net interest income increased by $8.0 million in the quarter ended September 30, 2016 compared to the same period in 2015, primarily due to organic and acquisition-related growth in our loan portfolio, partially offset by higher interest expense related to deposit growth and our debt issuance in the second quarter of 2016. Noninterest income increased $5.1 million, primarily due to growth in credit/debit card and ATM income, income from mortgage banking activities, and increased investment management and fiduciary revenue - see “Noninterest (Fee) income” for further information. Partially offsetting these increases was an $11.8 million increase in noninterest expenses, primarily reflecting our corporate development expenses associated with the acquisitions discussed above and higher employee-related and operating costs supporting our significant organic and acquisition growth - see “Noninterest Expense” for further information. During the third quarter of 2016, we resolved our largest problem loan, which was also one of our oldest, resulting in a $4.2 million charge-off and $3.0 million in incremental loan loss provision.

Net income for the first nine months of 2016 was $46.0 million, or $1.50 per diluted common share, compared to $39.5 million, or $1.39 per share, for the first nine months of 2015. As discussed above, corporate development expenses increased $4.9 million in comparison with the nine months ended September 30, 2015, primarily due to our acquisitions of Penn Liberty and Powdermill. Net interest income increased $21.9 million, primarily due to organic and acquisition-related growth in our loan portfolio, partially offset by a $4.2 million increase in interest expense primarily resulting from deposit growth, our issuance of debt during the second quarter and higher FHLB borrowings. Additionally, noninterest income increased $9.6 million from the prior period, primarily due to growth in credit/debit card and ATM income, income from mortgage banking activities, and increased investment management and fiduciary revenue - see “Noninterest (Fee) income” for further information. Partially offsetting these increases was a $21.5 million increase in noninterest expenses, primarily due to our corporate development expenses associated with the acquisitions discussed above as well as higher employee-related and operating costs supporting our significant growth in 2016 - see “Noninterest Expense” for further information.

Net Interest Income

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:


	Three Months Ended September 30,
	2016								2015
(Dollars in thousands)	Average Balance			Interest		Yield/ Rate (1)			Average Balance			Interest		Yield/ Rate (1)
*Assets:*
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans	$	1,264,882		$	15,470		4.87	%	$	1,076,077		$	12,630		4.69	%
Residential real estate loans (4)		299,480			3,541		4.73			249,645			2,516		4.03
Commercial loans		2,187,214			25,050		4.59			1,738,824			19,484		4.52
Consumer loans		414,653			4,485		4.30			335,487			3,807		4.50

Total loans		4,166,229			48,546		4.65			3,400,033			38,437		4.54
Mortgage-backed securities (5) (6)		736,100			3,854		2.09			743,312			3,588		1.93
Investment securities (5) (6)		201,264			1,214		3.54			152,356			875		3.32
Reverse mortgages (5) (6)		24,953			1,303		20.89			25,485			1,561		24.50
Other interest-earning assets		35,033			420		4.80			31,346			396		5.01

Total interest-earning assets		5,163,579			55,337		4.32			4,352,532			44,857		4.14

Allowance for loan losses		(39,053	)							(40,978	)
Cash and due from banks		122,561								88,855
Cash in non-owned ATMs		600,821								415,652
Bank-owned life insurance		100,989								76,947
Other noninterest-earning assets		241,370								157,811

Total assets	$	6,190,267							$	5,050,819

*Liabilities and Stockholders’ Equity:*
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand	$	855,052		$	295		0.14	%	$	677,665		$	162		0.09	%
Money market		1,162,986			850		0.29			961,654			622		0.26
Savings		494,482			180		0.14			400,275			52		0.05
Customer time deposits		567,600			874		0.61			395,637			553		0.55

Total interest-bearing customer deposits		3,080,120			2,199		0.28			2,435,231			1,389		0.23
Brokered certificates of deposit		142,133			213		0.60			212,117			198		0.37

Total interest-bearing deposits		3,222,253			2,412		0.30			2,647,348			1,587		0.24
FHLB of Pittsburgh advances		768,305			1,225		0.63			693,202			868		0.50
Trust preferred borrowings		67,011			415		2.46			67,011			343		2.03
Senior Debt		151,875			2,119		5.58			55,000			942		6.85
Other borrowed funds (7)		114,312			145		0.50			138,465			120		0.35

Total interest-bearing liabilities		4,323,756			6,316		0.58			3,601,026			3,860		0.43

Noninterest-bearing demand deposits		1,151,240								895,711
Other noninterest-bearing liabilities		54,686								48,405
Stockholders’ equity		660,585								505,677

Total liabilities and stockholders’ equity	$	6,190,267							$	5,050,819

Excess of interest-earning assets over interest-bearing liabilities	$	839,823							$	751,506

Net interest and dividend income				$	49,021							$	40,997

Interest rate spread							3.74	%							3.71	%

Net interest margin (8)							3.84	%							3.79	%

⁽¹⁾	Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.

⁽²⁾	Nonperforming loans are included in average balance computations.

⁽³⁾	Balances are reflected net of unearned income.

⁽⁴⁾	Includes residential mortgage loans HFS.

⁽⁵⁾	Includes securities available-for-sale at fair value.

⁽⁶⁾	Average balances and related yield are calculated using the fair value of available-for-sale securities.

⁽⁷⁾	Includes federal funds purchased and securities sold under agreement to repurchase.

⁽⁸⁾	Beginning in 2015, the annualization method used to calculate net interest margin was changed to actual/actual from 30/360. All net interest margin calculations were updated to reflect this change.


	Nine Months Ended September 30,
	2016								2015
(Dollars in thousands)	Average Balance			Interest		Yield/ Rate (1)			Average Balance			Interest		Yield/ Rate (1)
*Assets:*
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans	$	1,221,797		$	44,700		4.89	%	$	1,011,975		$	35,657		4.70	%
Residential real estate loans (8)		289,212			9,852		4.54			251,520			7,440		3.94
Commercial loans		2,057,839			69,364		4.54			1,724,712			57,613		4.49
Consumer loans		381,276			12,652		4.43			329,543			11,061		4.49

Total loans		3,950,124			136,568		4.64			3,317,750			111,771		4.51
Mortgage-backed securities (4) (6)		724,978			11,658		2.14			739,187			10,544		1.90
Investment securities (4)		203,616			3,660		3.51			154,689			2,587		3.22
Reverse mortgages (4) (5) (6)		25,120			3,826		20.31			26,879			3,963		19.66
Other interest-earning assets		32,694			1,174		4.79			30,560			1,898		8.30

Total interest-earning assets		4,936,532			156,886		4.31			4,269,065			130,763		4.14

Allowance for loan losses		(37,987	)							(40,196	)
Cash and due from banks		144,420								81,036
Cash in non-owned ATMs		481,570								415,652
Bank-owned life insurance		91,208								76,769
Other noninterest-earning assets		224,798								152,619

Total assets	$	5,840,541							$	4,954,945

*Liabilities and Stockholders’ Equity:*
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand	$	802,117		$	794		0.13	%	$	680,485		$	472		0.09	%
Money market		1,120,831			2,387		0.28			918,181			1,756		0.26
Savings		458,542			431		0.13			407,580			158		0.05
Customer time deposits		564,240			2,369		0.56			445,224			2,456		0.74

Total interest-bearing customer deposits		2,945,730			5,981		0.27			2,451,470			4,842		0.26
Brokered certificates of deposit		180,066			753		0.56			198,007			512		0.35

Total interest-bearing deposits		3,125,796			6,734		0.29			2,649,477			5,354		0.27
FHLB of Pittsburgh advances		719,121			3,397		0.63			647,129			2,332		0.48
Trust preferred borrowings		67,011			1,183		2.36			67,011			1,009		2.01
Senior Debt		93,900			4,236		6.01			55,000			2,825		6.85
Other borrowed funds (9)		135,596			545		0.54			131,347			339		0.34

Total interest-bearing liabilities		4,141,424			16,095		0.52			3,549,964			11,859		0.45

Noninterest-bearing demand deposits		1,027,746								857,082
Other noninterest-bearing liabilities		51,605								42,865
Stockholders’ equity		619,766								505,034

Total liabilities and stockholders’ equity	$	5,840,541							$	4,954,945

Excess of interest-earning assets over interest-bearing liabilities	$	795,108							$	719,101

Net interest income				$	140,791							$	118,904

Interest rate spread							3.79	%							3.69	%

Net interest margin							3.87	%							3.77	%

⁽¹⁾	Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.

⁽²⁾	Nonperforming loans are included in average balance computations.

⁽³⁾	Balances are reflected net of unearned income.

⁽⁴⁾	Includes securities available-for-sale.

⁽⁵⁾	Includes reverse mortgages.

⁽⁶⁾	Average balances and related yield are calculated using fair value of available-for-sale securities.

⁽⁷⁾	Represents loans held for sale in conjunction with asset disposition strategies.

⁽⁸⁾	Includes residential mortgage loans HFS.

⁽⁹⁾	Includes bonds payable related to the reverse mortgage securitization trust consolidation.

During the three months ended September 30, 2016, net interest income increased $8.0 million, or 23% from the three months ended September 30, 2015, and the net interest margin was 3.84%, a 5 basis point increase compared to 3.79% for the third quarter of 2015. These year-over-year increases in margin dollars and percentages reflect the impact of organic and acquisition growth, continued pricing discipline while improving balance sheet mix and positive performance of purchased loans and reverse mortgages.

The net interest margin for the nine months ended September 30, 2016 was 3.87%, compared to 3.77% for the same period in 2015, a 10 basis point increase. The nine months ended September 30, 2015 included a $0.8 million special FHLB dividend which added 4 basis points to the net interest margin. Compared to the nine months ended September 30, 2015, net interest income increased $21.9 million, or 20% in the nine months ended September 30, 2016. In addition, and similar to the quarterly discussion above, the increase in net interest margin and income reflects improvement due to increases in higher yielding loans and deposit pricing management.

Provision/Allowance for Loan Losses

We maintain an allowance for loan losses at an appropriate level based on our assessment of estimable and probable losses in the loan portfolio, pursuant to GAAP, which is discussed in “Nonperforming Assets”. Our evaluation is based upon a review of the portfolio and requires significant, complex and difficult judgments. For the nine months ended September 30, 2016 and 2015, we recorded a provision for loan losses of $7.9 million and $6.0 million, respectively.

Our allowance for loan losses is based on the inherent risk of our loans and various other factors including but not limited to, collateral values, trends in asset quality, level of delinquent loans and concentrations. In addition, regional economic conditions are taken into consideration. The allowance for loan losses of $39.0 million at September 30, 2016 increased from $37.1 million at December 31, 2015, due to several discrete relationships that moved to nonaccrual status during the nine months ended September 30, 2016, as well as robust loan growth. The ratio of allowance for loan losses to total gross loans was 0.89% at September 30, 2016 and 0.98% at December 31, 2015 and was impacted by the acquisition of Penn Liberty. This ratio excluding the impact of all purchased loans would have been 1.10% at September 30, 2016. The allowance for loan losses and provision reflect the following:

•

Total net loans increased $618.0 million at September 30, 2016 when compared to December 31, 2015 including $144.9 million of organic loan growth.

•

Total loan delinquency decreased to 0.78% as of September 30, 2016, compared to 1.17% as of December 31, 2015.

•

Net charge-offs were $5.9 million for the nine months ended September 30, 2016 compared to $9.0 million for the nine months ended September 30, 2015.

•

The nonperforming assets to total assets ratio remained low at 0.61% at September 30, 2016 compared to 0.71% at December 31, 2015.

The table below represents a summary of changes in the allowance for loan losses for the nine months ended September 30, 2016 and 2015, respectively.


	For the Nine Months Ended September 30,
(Dollars in thousands)	2016			2015
Beginning balance	$	37,089		$	39,426
Provision for loan losses		7,862			6,012
Charge-offs:
Commercial		4,643			6,184
Owner-occupied commercial		1,556			623
Commercial real estate		79			808
Construction		59			—
Residential real estate		72			397
Consumer		1,422			2,074
Overdrafts		545			496

Total charge-offs		8,376			10,582

Recoveries:
Commercial		557			198
Owner-occupied commercial		66			62
Commercial real estate		310			83
Construction		486			179
Residential real estate		112			195
Consumer		709			591
Overdrafts		213			248

Total recoveries		2,453			1,556

Net charge-offs		5,923			9,026

Ending balance	$	39,028		$	36,412

Net charge-offs to average gross loans outstanding, net of unearned income⁽¹⁾		0.20	%		0.36	%

⁽¹⁾	Ratios for the nine months ended September 30, 2016 and 2015 are annualized.

Noninterest (Fee) Income

During the third quarter of 2016, the Company earned fee income of $26.8 million, an increase of $5.1 million, or 23%, compared to $21.7 million in the third quarter of 2015. Excluding net security gains in both periods, fee income increased $4.2 million, or 20%. This increase is primarily due to an increase of $1.3 million in credit/debit card and ATM income, $1.3 million in mortgage banking activities and $0.7 million in investment management and fiduciary revenue.

For the nine months ended September 30, 2016, the Company earned fee income of $74.8 million, an increase of 15% compared to the $65.2 million of fee income for the nine months ended September 30, 2015. The increase in fee income included increases in credit/debit card ATM income of $3.0 million, mortgage banking activities of $1.5 million, and investment management and fiduciary revenue of $1.4 million.

Noninterest Expense

Noninterest expense for the third quarter of 2016 was $50.5 million, an increase of $11.8 million, or 30%, from $38.7 million in the third quarter of 2015. Excluding corporate development costs in both periods, noninterest expense increased $6.8 million compared to the third quarter of 2015. Contributing to the year-over-year increase was $2.5 million of ongoing operating costs from the addition of the Penn Liberty, Alliance, and Powdermill franchises. The remaining increase reflects higher compensation and related infrastructure costs due to added staff to support the significant organic and acquisition growth as well as increased performance-based incentive costs.

For the nine months ended September 30, 2016, noninterest expense was $137.7 million, an increase of $21.4 million, or 18%, from $116.3 for the nine months ended at September 30, 2015. During the nine months ended September 30, 2016, professional fees increased $1.6 million, primarily due to higher legal fees in our Wealth Management segment. Year-over-year expense growth also included increases in salary expense and benefits, and other compensation expense of $9.0 million. The addition of the acquired franchises mentioned above contributed $5.7 million to higher year-over-year ongoing operating costs.

Income Taxes

We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded an income tax expense of $6.8 million and $24.0 million during the three months and nine months ended September 30, 2016, respectively, compared to an income tax expense of $8.1 million and $22.3 million for the same periods in 2015.

Our effective tax rate was 34.9% and 34.3% for the three and nine months ended September 30, 2016, respectively, compared to 35.9% and 36.0% during the same periods in 2015. The reduction in the effective tax rate is due to lower nondeductible acquisition costs in the 2016 periods combined with increased tax-exempt income. The effective tax rates in 2016 were also positively impacted by the tax benefit associated with the adoption of ASU No. 2016-09 as discussed in Note 1 - Recent Accounting Pronouncements, to the unaudited Consolidated Financial Statements.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, excess tax benefits from recognized stock compensation, and BOLI income. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options, nondeductible acquisition costs and a provision for state income tax expense.

We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.

RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE

The following table provides a reconciliation of tangible common book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure is important to management and investors to better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets.


	September 30,			December 31,
(Dollars in thousands, except per share amounts)	2016			2015
Tangible Common Book Value per Share of Common Stock
End of period balance sheet data:
Stockholders’ equity	$	692,010		$	580,471
Goodwill and other intangible assets		(172,709	)		(95,295	)

Tangible common equity (numerator)	$	519,301		$	485,176

Shares of common stock outstanding (denominator)		31,334			29,763

Book value per share of common stock	$	22.08		$	19.50
Goodwill and other intangible assets		(5.51	)		(3.20	)

Tangible book value per share of common stock	$	16.57		$	16.30

RECENT LEGISLATION

General

As a federally chartered savings institution the Bank is subject to regulation by the FHFA, an independent agency in the executive branch of the U.S. government, the FDIC, the Federal Reserve and the OCC (collectively, the Federal banking agencies). The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OCC periodically examines the Bank for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of the Bank. The Bank is required to file periodic reports with the OCC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the FHFA and the Federal Reserve.

CEO pay ratio disclosure

On August 5, 2015, the SEC adopted a new rule requiring public companies to disclose the CEO’s annual total compensation, the annual total compensation of the company’s median employee, and the ratio of these two amounts in certain SEC Filings that require executive compensation information. With certain exceptions, registrants must comply with this rule for the first fiscal year beginning on or after January 1, 2017.

Basel III

In 2013, the Federal banking agencies approved the final rules implementing the BCBS capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The final rules also establish a new capital conservation buffer, comprised of common equity Tier 1 capital, above the regulatory minimum capital requirements. This capital conservation buffer will be phased-in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. The final rules also revise the standards for an insured depository institution to be “well-capitalized” under the banking agencies’ prompt corrective action framework, requiring a common equity Tier 1 capital ratio of 6.5%, Tier 1 capital ratio of 8.0% and total capital ratio of 10.0%, while leaving unchanged the existing 5.0% leverage ratio requirement. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. Newly issued trust preferred securities and cumulative perpetual preferred stock may no longer be included in Tier 1 capital. However, for depository institution holding companies of less than $15 billion in total consolidated assets, such as the Company, most outstanding trust preferred securities and other non-qualifying securities issued prior to May 19, 2010 are permanently grandfathered to be included in Tier 1 capital (up to a limit of 25% of Tier 1 capital, excluding non-qualifying capital instruments).

The phase-in period for the final rules began for us on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule and should be fully phased-in by January 1, 2019. Our capital levels at September 30, 2016 remain in excess of the “well-capitalized” regulatory benchmarks under the new rules.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Incorporated herein by reference from Item 2 Part I of this Quarterly Report on Form 10-Q.

Item 4.

Controls and Procedures

(a)

Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)

Changes in internal control over financial reporting. During the quarter ended September 30, 2016, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

Incorporated herein by reference to Note 15 – Legal Proceedings to the Consolidated Financial Statements

Item 1A.

Risk Factors

There have not been any material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, previously filed with the SEC.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2016.


2016	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July	—	$	N/A	—	1,041,194
August	50,000		37.13	50,000	991,194
September	—		N/A	—	991,194

Total	50,000	$	37.13	50,000

(1) During the fourth quarter of 2015, the Board of Directors approved a stock buyback program of up to 5% of total outstanding shares of common stock. Under the program, purchases may be made from time to time in the open market or through negotiated transactions, subject to market conditions and other factors, and in accordance with applicable securities laws. There is no fixed termination date for the repurchase program, and the repurchase program may be suspended or discontinued at any time.

Item 3.

Defaults upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

Not applicable

Item 6. Exhibits

(a)

Exhibit 31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(b)

Exhibit 31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(c)

Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(d)

Exhibit 101.INS – XBRL Instance Document

(e)

Exhibit 101.SCH – XBRL Schema Document

(f)

Exhibit 101.CAL – XBRL Calculation Linkbase Document

(g)

Exhibit 101.LAB – XBRL Labels Linkbase Document

(h)

Exhibit 101.PRE – XBRL Presentation Linkbase Document

(i)

Exhibit 101.DEF – XBRL Definition Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						WSFS FINANCIAL CORPORATION

Date: November 09, 2016						/s/ Mark A. Turner
						Mark A. Turner
						President and Chief Executive Officer
						(Principal Executive Officer)

Date: November 09, 2016						/s/ Dominic C. Canuso
						Dominic C. Canuso
						Executive Vice President and
						Chief Financial Officer
						(Principal Financial and Accounting Officer)