10-K 1 d293979d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2016

OR

 

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

For the transition period from                      to                     

Commission file number 001-35638

WSFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware   22-2866913

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

500 Delaware Avenue,

Wilmington, Delaware

  19801
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (302) 792-6000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

6.25% Senior Notes Due 2019

4.50% Senior Notes Due 2026

  The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    YES  ☒    NO  

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    YES  ☐    NO  ☒

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 twelve 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 for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  

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

The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant’s common stock as quoted on NASDAQ as of June 30, 2016 was $933,723,516. For purposes of this calculation only, affiliates are deemed to be directors, executive officers and beneficial owners of greater than 10% of the outstanding shares.

As of February 24, 2017, there were issued and outstanding 31,393,828 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2017 are incorporated by reference in Part III hereof.


Table of Contents

WSFS FINANCIAL CORPORATION

TABLE OF CONTENTS

 

         Page  
  Part I   
Item 1.  

Business

     3  
Item 1A.  

Risk Factors

     26  
Item 1B.  

Unresolved Staff Comments

     38  
Item 2.  

Properties

     38  
Item 3.  

Legal Proceedings

     38  
Item 4.  

Mine Safety Disclosures

     38  
  Part II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      39  
Item 6.  

Selected Financial Data

     41  
Item 7.  

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

     42  
Item 7A.  

Quantitative and Qualitative Disclosure about Market Risk

     60  
Item 8.  

Financial Statements and Supplementary Data

     61  
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     127  
Item 9A.  

Controls and Procedures

     130  
Item 9B.  

Other Information

  
  Part III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     131  
Item 11.  

Executive Compensation

     131  
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      131  
Item 13.  

Certain Relationships and Related Transactions and Director Independence

     132  
Item 14.  

Principal Accounting Fees and Services

     132  
  Part IV   
Item 15.  

Exhibits, Financial Statement Schedules Signatures

     133  
Item 16.  

Form 10-K Summary

     134  
 

Signatures

     135  

 


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FORWARD-LOOKING STATEMENTS

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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;

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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;

 

   

the costs associated with resolving any problem loans, litigation and other risks and uncertainties, including those discussed in other documents filed by the Company with the Securities and Exchange Commission from time to time.

These risks and uncertainties and other risks and uncertainties that could adversely affect our business, results of operations, financial condition or future prospects are discussed herein, including under the heading “Risk Factors,” and in other documents filed by the Company with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as required by law.

DEFINED TERMS

Certain capitalized terms used throughout this report are defined in Note 1 to the Consolidated Financial Statements.

 

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PART I

ITEM 1. BUSINESS

OUR BUSINESS

WSFS Financial Corporation (the Company, our Company, we, our or us) is parent to Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies in the United States (U.S.) continuously operating under the same name. At $6.8 billion in assets and $15.7 billion in fiduciary assets, WSFS Bank is also the largest bank and trust company headquartered in Delaware and the Delaware Valley. WSFS Bank has been in operation for 185 years. In addition to its focus on stellar customer experiences, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed banking institution. For the eleventh consecutive year, our Associates (the term we use to refer to our employees) ranked us a “Top Workplace” in Delaware. In addition, we were named the ‘Top Bank’ in Delaware for the sixth year in a row; and we were named the ‘Top Bank’ in Delaware County in southeastern Pennsylvania for the first time in our relatively short history in that market. We were also named a ‘Top Ten Workplace’ in the greater Philadelphia market by Philly.com. 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 experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.

Our core banking business is commercial lending primarily 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. We service our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage services 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 and abstract and title company specializing in a variety of residential mortgage and refinancing solutions.

Our Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through six businesses. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management (Cypress) is a registered investment advisor with $677.9 million in assets under management. Cypress’ primary market segment is high net worth individuals, and it offers a ‘balanced’ investment style focused on preservation of capital and providing for current income. West Capital Management (West Capital), a registered investment advisor with approximately $738.1 million in assets under management, is a fee-only wealth management firm which operates under a multi-family office philosophy and provides, fully customized solutions tailored to the unique needs of institutions and high net worth individuals. Christiana Trust, with $14.3 billion in assets under management and administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, administration, custodial and commercial domicile services to corporate and institutional clients. Powdermill Financial Solutions (Powdermill) is a multi-family office that specializes in providing unique, independent solutions to high net worth individuals, families and corporate executives through a coordinated, centralized approach. 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.

Our Cash Connect segment is a premier provider of ATM vault cash, smart safe and other cash logistics services in the U.S. Cash Connect services over 20,000 non-bank ATMs and over 800 retail smart safes nationwide with over $1.0 billion in total cash managed, as well as 446 ATMs for WSFS Bank. Our ATM network is the largest branded ATM network in Delaware. Cash Connect is an innovator and has various additional products and services in development to continue to diversify and expand its revenue sources.

 

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WSFS POINTS OF DIFFERENTIATION

While all banks offer similar products and services, we believe that WSFS, through its service model, has set itself apart from other banks in our market and the industry in general. In addition, community banks such as WSFS have been able to distinguish themselves from large national or international banks by providing our customers with the service levels, responsiveness and local decision making they prefer. The following factors summarize what we believe are our points of differentiation:

Building Associate Engagement and Customer Advocacy

Our business model is built on a concept called Human Sigma, which we have implemented in our strategy of “Engaged Associates delivering stellar experiences growing Customer Advocates and value for our Owners.” The Human Sigma model, identified by Gallup, Inc., begins with Associates who have taken ownership of their jobs and therefore perform at a higher level. We invest significantly in recruitment, training, development and talent management because our Associates are the cornerstone of our business model. This strategy motivates Associates and unleashes innovation and productivity to engage our most valuable asset, our Customers, by providing them with stellar experiences. As a result, we build Customer Advocates, or Customers who have developed an emotional attachment to the Bank. Research studies continue to show a direct link between Associate engagement, customer advocacy and a company’s financial performance. Our success with this strategy creates a virtuous cycle, further building an environment of engagement and advocacy.

 

LOGO

Surveys conducted for us by Gallup, Inc. indicate:

 

   

Our Associate Engagement scores consistently rank in the top decile of companies polled. In 2016 our engagement ratio was 14.2:1, which means there were 14.2 engaged Associates for every actively disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national average of 1.9:1.

 

   

63.2% of our customers ranked us a “five” out of “five,” strongly agreeing with the statement “WSFS is the perfect bank for me.”

By fostering a culture of engaged and empowered Associates, we believe we have become the employer and bank of choice in our market. In 2016, for the eleventh year in a row, we were recognized by The Wilmington News Journal as a “Top Work Place” for large corporations in the state of Delaware, and we were named the “Top Bank” in Delaware County in southeastern Pennsylvania for the first time in our relatively short history in that market, indicating the strength of our focus on customer service, We were also named a “Top Ten Workplace” in the greater Philadelphia market by Philly.com.

 

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Community Banking Model

Our size and community banking model play a key role in our success. Our approach to business combines a service-oriented culture with a strong complement of products and services, all aimed at meeting the needs of our retail and business Customers. We believe the essence of being a community bank means that we are:

 

   

Small enough to offer Customers responsive, personalized service and direct access to decision makers.

 

   

Large enough to provide all the products and services needed by our target market customers.

As the financial services industry has consolidated, many independent banks have been acquired by national companies that have centralized their decision-making authority away from their customers and focused their mass-marketing on a regional or even national customer base. We believe this trend has underserved smaller business owners who have become accustomed to dealing directly with their bank’s senior executives, discouraged retail customers who often experience deteriorating levels of service in branches and other service outlets, and frustrated bank employees who are no longer empowered to provide good and timely service to their customers.

WSFS Bank offers:

 

   

One primary point of contact - each of our relationship managers is responsible for understanding his or her Customers’ needs and bringing together the right resources in the Bank to meet those needs.

 

   

A customized approach to our Customers - we believe this gives us an advantage over our competitors who are too large or centralized to offer customized products or services.

 

   

Products and services that our Customers value - this includes a broad array of banking, cash management and trust and wealth management products, as well as a legal lending limit high enough to meet the credit needs of our Customers, especially as they grow.

 

   

Rapid response and a company that is easy to do business with - our Customers tell us this is an important differentiator from larger, in-market competitors.

Strong Market Demographics

Our markets, which primarily include Delaware and southeastern Pennsylvania, are situated in the middle of the Washington, DC - New York corridor which includes the urban markets of Philadelphia and Baltimore. Delaware benefits from this urban concentration as well as from a unique political, legal, tax and business environment. Our markets have rates of unemployment, median household income and rates of population growth which all compare favorably to national averages.

 

(Most recent available statistics)   
Delaware
    Southeastern
Pennsylvania  (1)
    National
Average
 

Unemployment (For December 2016) (2) (3)

     4.3     3.9     4.7

Median Household Income (2011-2015) (4)

   $ 60,509     $ 77,549     $ 53,889  

Population Growth (2010-2016) (4) (5)

     6.0     2.2     4.7

 

(1) Comprised of Chester, Delaware and Montgomery counties
(2) Bureau of Labor Statistics, Economy at a Glance
(3) Southeastern Pennsylvania data is for November 2016
(4) U.S. Census Bureau, State & County Quick Facts
(5) Southeastern Pennsylvania data is for 2010-2015

Balance Sheet Management

We put a great deal of focus on actively managing our balance sheet. This manifests itself in:

 

   

Prudent capital levels - Maintaining prudent capital levels is key to our operating philosophy. At December 31, 2016 our tangible capital ratio was 7.55 % and all regulatory capital levels for WSFS Bank reflected a meaningful cushion above well-capitalized levels. At December 31, 2016, WSFS Bank’s common equity Tier 1 capital ratio was 11.19 % and $261.3 million in excess of the 6.5% “well-capitalized” level under

 

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the banking agencies’ prompt corrective action framework: the Bank’s Tier 1 capital ratio was 11.19% and $177.8 million in excess of the 8% “well-capitalized” level, and the Bank’s total risk-based capital ratio was 11.93%, or $107.2 million above the “well-capitalized” level of 10%.

 

   

Disciplined lending - We maintain discipline in our lending with a particular focus on portfolio diversification and granularity. Diversification includes limits on loans to one borrower as well as industry and product concentrations. We supplement this portfolio diversification with a disciplined underwriting process and the benefit of knowing our customers. We have also taken a proactive approach to identifying trends in our local economy and have responded to areas of concern.

 

   

Focus on credit quality - We seek to control credit risk in our investment portfolio and use this portion of our balance sheet primarily to help us manage liquidity and interest rate risk, while providing marginal income and tax relief. Our philosophy and pre-purchase due diligence has allowed us to avoid the significant investment write-downs taken by many of our bank peers during the last economic downturn.

 

   

Asset/Liability management strategies - We have created an investment portfolio that is consistent with the Board’s approved risk appetite and we believe the portfolio contains minimal risks due to our exclusion of non-Agency (Private label) MBS and other asset-backed securities. We also believe that our thorough due diligence is effective in mitigating the credit risk associated with municipal securities that we have added. Further, our portfolio is highly liquid given our large amount of Agency MBS.

Disciplined Capital Management

We understand that our capital (or stockholders’ equity) belongs to our stockholders. They have entrusted this capital to us with the expectation that it will earn an appropriate return relative to the risk we take. Mindful of this balance, we prudently, but aggressively, manage our capital.

Strong Performance Expectations and Alignment with Stockholder Priorities

We are focused on high-performing, long-term financial goals. We define “high-performing” as the top quintile of a relevant peer group in return on assets (ROA), return on tangible common equity (ROTCE) and EPS growth. Management incentives are, in large part, based on driving performance in these areas. More details on management incentive plans will be included in the proxy statement for our 2017 annual meeting of stockholders.

During 2016, our performance reflected continued progress on our path towards becoming a sustainably high performing company. For the year ended December 31, 2016, WSFS reported ROA of 1.06%. Excluding corporate development costs and securities gains, our core ROA (a non-GAAP measure) was 1.13% for 2016, demonstrating our steady progress toward the goals we set in our three year, 2016-2018 Strategic Plan. For a reconciliation of core ROA to ROA, the most comparable GAAP measure, please refer to “Reconciliation of Core ROA” located at the end of this section.

Growth

We have achieved success over the long term in lending and deposit gathering, growing the Wealth Management segment’s assets under administration and growing Cash Connect’s customer base and services. Our success has been the result of a focused strategy that provides service, responsiveness and careful execution in a consolidating marketplace. We plan to continue to grow by:

 

   

Developing talented, service-minded Associates - We have successfully recruited Associates with strong ties to, and the passion to serve, their communities to enhance our service in existing markets and to provide a strong start in new communities. We also focus efforts on developing talent and leadership from our current Associate base to better equip those Associates for their jobs and prepare them for leadership roles at WSFS.

 

   

Embracing the Human Sigma concept - We are committed to building Associate Engagement and Customer Advocacy as a way to differentiate ourselves and grow our franchise.

 

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Building fee income through investment in and growth of our Wealth Management and Cash Connect (ATM services) segments.

 

   

Continuing strong growth in commercial lending by:

 

   

Offering local decision-making by seasoned banking professionals.

 

   

Executing our community banking model that combines stellar experiences with the banking products and services our business customers’ demand.

 

   

Adding seasoned lending professionals that have helped us win customers in our Delaware and southeastern Pennsylvania markets.

 

   

Aggressively growing deposits. We have energized our retail branch strategy by combining stellar experiences with an expanded and updated branch network. We plan to continue to grow deposits by:

 

   

Offering products through an expanded and updated branch network.

 

   

Providing a stellar experience to our Customers.

 

   

Further expanding our commercial Customer relationships with deposit and cash management products.

 

   

Finding creative ways to build deposit market share such as targeted marketing programs.

 

   

Selectively opening new branches, including in preferred southeastern Pennsylvania locations.

 

   

Seeking strategic acquisitions. During 2016, we completed the acquisition of Penn Liberty Financial Corp. and its wholly-owned subsidiary, Penn Liberty Bank, expanding our presence in the southeastern Pennsylvania market. In 2016, we also acquired the assets of Powdermill Financial Solutions, LLC, a multi-family office serving an affluent clientele in the local community and throughout the U.S., and West Capital Management, Inc., an independent, fee-only wealth management firm providing fully-customized solutions tailored to the unique needs of institutions and high net worth individuals which operates under a multi-family office philosophy. In 2015, we completed the acquisition of Alliance Bancorp Inc. of Pennsylvania (Alliance) and its wholly-owned banking subsidiary Alliance Bank. In 2017, we intend to focus on optimizing our recent acquisitions in southeastern Pennsylvania and our Wealth business. Over the next several years, we expect our growth to continue to be a mix of organic growth and acquisition-related growth, consistent with our long-term strategy.

Innovation

Our organization is committed to product and service innovation as a means to drive growth and to stay ahead of changing customer demands and emerging competition. We are focused on developing and maintaining a strong “culture of innovation” that solicits, captures, prioritizes and executes innovation initiatives, from product creation to process improvements. Cash Connect, a premier provider of ATM vault cash, smart safe and other cash logistics services, serves as an innovation engine driving enhancements such as mobile phone cash withdrawals from WSFS ATMs, and has developed best-in-class cash logistics and reconciliation software. These innovations have created internal efficiencies and valued services for our local banking customers and merchants across the nation. We intend to continue to leverage technology and innovation to grow our business and to successfully execute on our strategy.

Over the past several years, we have formed several strategic alliances which have allowed us to stay at the forefront of emerging technology in our industry. Through these partnerships, we look forward to offering and supporting even more innovative products to the financial services marketplace, continuing our organizational learning in this fast-developing space, and participating in value creation for our shareholders.

Our innovation efforts were recognized by BAI when they selected WSFS as a finalist for their 2016 Global Banking Innovation Awards for the category of Most Innovative Community-Based Banking Organization. The award category was created to recognize institutions that have either created products, made investments and delivered services to meet their community’s most pressing needs. The award category also recognizes institutions who have a culture of creativity which includes an innovation framework or processes that are supported by all levels of leadership.

 

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Values

Our values address integrity, service, accountability, transparency, honesty, growth and desire to improve. They are the core of our culture, they make us who we are and we live them every day.

At WSFS we:

 

   

Do the right thing.

 

   

Serve others.

 

   

Are open and candid.

 

   

Grow and improve.

Results

Our focus on these points of differentiation has allowed us to grow our core franchise and build value for our stockholders. Since 2011, our commercial loans have grown from $2.2 billion to $3.7 billion, a strong 11% compound annual growth rate (CAGR). Over the same period, customer deposits has grown from $2.9 billion to $4.6 billion, a 10% CAGR. More importantly, over the last decade, stockholder value has increased at a far greater rate than our banking peers. An investment of $100 in WSFS stock in 2006 would be worth $230 at December 31, 2016. By comparison, $100 invested in the Nasdaq Bank Index in 2006 would be worth $142 at December 31, 2016.

SUBSIDIARIES

The Company has four consolidated direct subsidiaries: WSFS Bank, Cypress Capital Management, LLC (Cypress), WSFS Capital Management, LLC (West Capital) and WSFS Wealth Management, LLC (Powdermill) as well as one unconsolidated subsidiary, 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). WSFS Wealth Investments markets various third-party investment and insurance products such as single-premium annuities, whole life policies and securities, primarily through our retail banking system and directly to the public. 1832 Holdings, Inc. was formed to hold certain debt and equity investment securities. Monarch offers commercial domicile services which include providing employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.

Cypress and West Capital are registered investment advisors with approximately $677.9 million and $738.1 million in assets under management, respectively, at December 31, 2016.

Powdermill is a multi-family office that specializes in providing unique, independent solutions to high net worth individuals, families and corporate executives through a coordinated, centralized approach.

The Trust is our unconsolidated subsidiary, and was formed in 2005 to issue $67.0 million aggregate principal amount of Pooled Floating Rate Capital Securities.

SEGMENT INFORMATION

For financial reporting purposes, our business has three segments: WSFS Bank, Cash Connect, and Wealth Management. The WSFS Bank segment provides loans and other financial products to commercial and retail customers. Cash Connect provides ATM vault cash and cash logistics services through strategic partnerships with several of the largest network, manufacturers and service providers in the ATM industry. The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients.

Segment financial information for the years ended December 31, 2016, 2015 and 2014 is provided in Note 20 to the Consolidated Financial Statements in this report.

 

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DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY

Condensed average balance sheets for each of the last three years and analyses of net interest income and changes in net interest income due to changes in volume and rate are presented in “Results of Operations” included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

CREDIT EXTENSION ACTIVITIES

Over the past several years we have focused on growing the more profitable segments of our loan portfolio. Our current portfolio lending activity is concentrated on lending to small- to mid-sized businesses in the mid-Atlantic region of the U.S., primarily in Delaware, southern Pennsylvania, Maryland and New Jersey, as well as in northern Virginia. Since 2012, our total net commercial loans have increased by $1.5 billion, or 68% and accounted for approximately 85% of our net loan portfolio at December 31, 2016, compared to 82% at December 31, 2012. Based on current market conditions, we expect our focus on growing C&I loans and other relationship-based commercial loans to continue during the remainder of 2017 and beyond.

The following table shows the composition of our loan portfolio at year-end for the last five years.

 

    At December 31,  
(Dollars in thousands)   2016     2015     2014     2013     2012  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  

Types of Loans

                   

Commercial real estate:

                   

Commercial mortgage

  $ 1,163,554       26.3   $ 966,698       25.9   $ 805,459       25.5   $ 725,193       25.0   $ 631,365       23.2

Construction

    222,712       5.1       245,773       6.6       142,497       4.5       106,074       3.6       133,375       4.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    1,386,266       31.4       1,212,471       32.5       947,956       30.0       831,267       28.6       764,740       28.1  

Commercial

    1,287,731       29.1       1,061,597       28.5       920,072       29.1       810,882       27.9       704,491       25.9  

Commercial — owner-occupied

    1,078,162       24.4       880,643       23.6       788,598       25.0       786,360       27.1       770,581       28.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

    3,752,159       84.9       3,154,711       84.6       2,656,626       84.1       2,428,509       83.6       2,239,812       82.3  

Consumer loans:

                   

Residential real estate

    267,028       6.0       259,679       7.0       218,329       6.9       221,520       7.6       243,627       8.9  

Consumer

    450,029       10.2       360,249       9.6       327,543       10.4       302,234       10.4       289,001       10.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

    717,057       16.2       619,928       16.6       545,872       17.3       523,754       18.0       532,628       19.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

  $ 4,469,216       101.1     $ 3,774,639       101.2     $ 3,202,498       101.4     $ 2,952,263       101.6     $ 2,772,440       101.8  

Less:

                   

Deferred fees (unearned income)

    7,673       0.2       8,500       0.2       6,420       0.2       6,043       0.2       4,602       0.2  

Allowance for loan losses

    39,751       0.9       37,089       1.0       39,426       1.2       41,244       1.4       43,922       1.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans (1)

  $ 4,421,792       100.0   $ 3,729,050       100.0   $ 3,156,652       100.0   $ 2,904,976       100.0   $ 2,723,916       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) Excludes $54,782; $41,807; $28,508; $31,491 and $12,758 of residential mortgage loans held for sale at December 31, 2016, 2015, 2014, 2013, and 2012, respectively.

The following table shows the remaining time until our loans mature. The first table details the total loan portfolio by type of loan. The second table details the total loan portfolio by those with fixed interest rates and those with adjustable interest rates. The tables show loans by remaining contractual maturity. Loans may be pre-paid, so the actual maturity may be earlier than the contractual maturity. Prepayments tend to be highly dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are reported in the Less than One Year category.

 

(Dollars in thousands)    Less than
One Year
     One to
Five Years
     Over
Five Years
     Total  

Commercial mortgage loans

   $ 173,131      $ 531,304      $ 459,119      $ 1,163,554  

Construction loans

     79,158        106,718        36,836        222,712  

Commercial loans

     365,096        541,418        381,217        1,287,731  

Commercial owner-occupied loans

     104,935        302,920        670,307        1,078,162  

Residential real estate loans (1)

     4,006        3,969        259,053        267,028  

Consumer loans

     51,801        41,793        356,435        450,029  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 778,127      $ 1,528,122      $ 2,162,967      $ 4,469,216  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(Dollars in thousands)    Less than
One Year
     One to
Five Years
     Over
Five Years
     Total  

Rate sensitivity:

           

Fixed

   $ 102,802      $ 731,498      $ 974,285      $ 1,808,585  

Adjustable (2)

     675,325        796,624        1,188,682        2,660,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross loans

   $ 778,127      $ 1,528,122      $ 2,162,967      $ 4,469,216  
  

 

 

    

 

 

    

 

 

    

 

 

 
(1) Excludes loans held for sale.
(2) Includes hybrid adjustable-rate mortgages.

Commercial Real Estate, Owner-Occupied Commercial, Construction and Commercial Lending

Pursuant to section 5(c) of the Home Owners’ Loan Act (HOLA), federal savings banks are generally permitted to invest up to 400% of their total regulatory capital in nonresidential real estate loans and up to 20% of their assets in commercial loans. As a federal savings bank that was formerly chartered as a Delaware savings bank, the Bank has certain additional lending authority.

Commercial, owner-occupied commercial, commercial mortgage and construction loans have higher levels of risk than residential mortgage lending. These loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and may be more subject to adverse conditions in the commercial real estate market or in the general economy than residential mortgage loans. The majority of our commercial and commercial real estate loans are concentrated in Delaware, southeastern Pennsylvania (Chester and Delaware counties) and nearby areas.

We offer commercial real estate mortgage loans on multi-family properties and on other commercial real estate. Generally, loan-to-value ratios for these loans do not exceed 80% of appraised value at origination.

Our commercial mortgage portfolio was $1.2 billion at December 31, 2016. Generally, this portfolio is diversified by property type, with no type representing more than 32% of the portfolio. The largest type is retail-related (shopping centers and other retail) with balances of $354.6 million. The average loan size of a loan in the commercial mortgage portfolio is $0.6 million and only five loans are greater than $8.0 million, with no loans greater than $13.0 million.

We offer commercial construction loans to developers. In some cases these loans are made as “construction/permanent” loans, which provides for disbursement of loan funds during construction with automatic conversion to mini-permanent loans (one - five years) upon completion of construction. These construction loans are short-term, usually not exceeding two years, with interest rates indexed to our WSFS prime rate, the “Wall Street” prime rate or London InterBank Offered Rate (LIBOR), in most cases, and are adjusted periodically as these indices change. The loan appraisal process includes the same evaluation criteria as required for permanent mortgage loans, but also takes into consideration: completed plans, specifications, comparables and cost estimates. Prior to approval of each loan, these criteria are used as a basis to determine the appraised value of the subject property when completed. Our policy requires that all appraisals be reviewed independently from our commercial business development staff. At origination, the loan-to-value ratios for construction loans generally do not exceed 75%. The initial interest rate on the permanent portion of the financing is determined by the prevailing market rate at the time of conversion to the permanent loan. At December 31, 2016, $413.3 million was committed for construction loans, of which $222.7 million was outstanding. Residential construction and land development (CLD) represented $135.6 million, or 3%, of the loan portfolio and 20% of Tier 1 capital (Tier 1 + ALLL). Our commercial CLD portfolio was $58.1 million, or 1%, of total loans, and our “land hold” loans, which are land loans not currently being developed, were $34.7 million, or 0.8%, of total loans, at December 31, 2016.

Commercial and industrial and owner-occupied commercial loans make up the remainder of our commercial portfolio and include loans for working capital, financing equipment and real estate acquisitions, business expansion and other business purposes. These relationships generally range in amounts of up to $30.0 million (with two relationships exceeding this level) with an average loan balance in the portfolio of $0.3 million and terms ranging from less than one year to ten years. The loans generally carry variable interest rates indexed to our WSFS prime rate, “Wall Street” prime

 

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rate or LIBOR. As of December 31, 2016, our commercial and industrial and owner-occupied commercial loan portfolios were $2.4 billion and represented 52% of our total loan portfolio. These loans are diversified by industry, with no industry representing more than 13% of the portfolio.

Federal law limits the Bank’s extensions of credit to any one borrower to 15% of our unimpaired capital (approximately $95.0 million), and an additional 10% if the additional extensions of credit are secured by readily marketable collateral. Extensions of credit include outstanding loans as well as contractual commitments to advance funds, such as standby letters of credit. At December 31, 2016, no borrower had collective (relationship) total extensions of credit exceeding these legal lending limits. Only four commercial relationships, comprised of two commercial and industrial relationships and two commercial real estate relationships, reach total extensions of credit in excess of $30.0 million when all loans related to the relationship are combined.

Residential Real Estate Lending

Generally, we originate residential first mortgage loans with loan-to-value ratios of up to 80% and require private mortgage insurance for up to 35% of the mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. We do not have any significant concentrations of such insurance with any one insurer. On a very limited basis, we have originated or purchased loans with loan-to-value ratios exceeding 80% without a private mortgage insurance requirement. At December 31, 2016, the balance of all such loans was approximately $8.6 million.

Generally, our residential mortgage loans are underwritten and documented in accordance with standard underwriting criteria published by the FHLMC and other secondary market participants to assure maximum eligibility for subsequent sale in the secondary market. Typically, we sell only those loans originated specifically with the intention to sell on a “flow” basis.

To protect the propriety of our liens, we require title insurance be obtained. We also require fire, extended coverage casualty and flood insurance (where applicable) for properties securing residential loans. All properties securing our residential loans are appraised by independent, licensed and certified appraisers and are subject to review in accordance with our standards.

The majority of our adjustable-rate, residential real estate loans have interest rates that adjust yearly after an initial period. The change in rate for the first adjustment date could be higher than the typical limited rate change of two percentage points at each subsequent adjustment date. Adjustments are generally based upon a margin (currently 2.75% for U.S. Treasury index; 2.5% for LIBOR index) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity, as published by the Board of Governors of the Federal Reserve System (the Federal Reserve).

Usually, the maximum rate on these loans is six percent above the initial interest rate. We underwrite adjustable-rate loans under standards consistent with private mortgage insurance and secondary market underwriting criteria. We do not originate adjustable-rate mortgages with payment limitations that could produce negative amortization.

The adjustable-rate mortgage loans in our loan portfolio help mitigate the risk related to our exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of re-pricing adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower. Further, although adjustable-rate mortgage loans allow us to increase the sensitivity of our asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on our adjustable-rate mortgages will adjust sufficiently to compensate for increases to our cost of funds during periods of extreme interest rate increases.

The original contractual loan payment period for residential loans is normally 10 to 30 years. Because borrowers may refinance or prepay their loans without penalty, these loans tend to remain outstanding for a substantially shorter period of time. First mortgage loans customarily include “due-on-sale” clauses. This provision gives us the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage. We enforce due-on-sale clauses through foreclosure and other legal proceedings to the extent available under applicable laws.

 

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In general, loans are sold without recourse except for the repurchase right arising from standard contract provisions covering violation of representations and warranties or, under certain investor contracts, a default by the borrower on the first payment. We also have limited recourse exposure under certain investor contracts in the event a borrower prepays a loan in total within a specified period after sale, typically 120 days. The recourse is limited to a pro rata portion of the premium paid by the investor for that loan, less any prepayment penalty collectible from the borrower. There were no repurchases in 2016, one repurchase totaling $0.4 million in 2015 and two repurchases in 2014 totaling $0.4 million.

Consumer Lending

Our primary consumer credit products (excluding first mortgage loans) are home equity lines of credit and equity-secured installment loans. At December 31, 2016, home equity lines of credit outstanding totaled $290.3 million and equity-secured installment loans totaled $82.2 million. In total, these product lines represented 83% of total consumer loans. Some home equity products grant a borrower credit availability of up to 100% of the appraised value (net of any senior mortgages) of their residence. However, typically maximum loan to value (LTV) limits are 89% for primary residences and 75% for all other properties. At December 31, 2016, we had $543.0 million in total commitments for home equity lines of credit. Home equity lines of credit offer customers potential Federal income tax advantages, the convenience of checkbook and debit card access, and revolving credit features for a portion of the life of the loan and typically are more attractive in a low interest rate environment. Home equity lines of credit expose us to the risk that falling collateral values may leave us inadequately secured. The risk on installment products like home equity loans is mitigated as they amortize over time.

The following table shows our consumer loans at year-end, for the last five years.

 

    At December 31,  
    2016     2015     2014     2013     2012  
(Dollars in thousands)   Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
 

Equity secured installment loans

  $ 82,182       18.3   $ 89,218       24.7   $ 72,795       22.2   $ 69,230       22.9     $ 59,091       20.4

Home equity lines of credit

    290,310       64.5       226,592       62.9       218,683       66.8       193,255       63.9       195,936       67.8  

Student loans

    42,932       9.5       15,941       4.4       587       0.2       144       0.0       —         —    

Personal loans

    22,007       4.9       17,604       4.9       16,082       4.9       16,397       5.5       12,408       4.3  

Unsecured lines of credit

    10,613       2.4       9,244       2.6       9,415       2.9       13,147       4.4       9,197       3.2  

Other

    1,985       0.4       1,650       0.5       9,981       3.0       10,061       3.3       12,369       4.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

  $ 450,029       100.0   $ 360,249       100.0   $ 327,543       100.0   $ 302,234       100.0   $ 289,001       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan Originations, Purchases and Sales

We engage in traditional lending activities primarily in Delaware, southeastern Pennsylvania, and contiguous areas of neighboring states. As a federal savings bank, however, we may originate, purchase and sell loans throughout the U.S. We have purchased limited amounts of loans from outside our normal lending area when such purchases are deemed appropriate. We originate fixed-rate and adjustable-rate residential real estate loans through our banking offices.

During 2016 we originated $450.3 million of residential real estate loans. This compares to originations of $434.6 million in 2015. From time to time, we have purchased whole loans and loan participations in accordance with our ongoing asset and liability management objectives. There were no such purchases in either 2016 or 2015. Residential real estate loan sales totaled $344.5 million in 2016 and $286.2 million in 2015. We sell most newly originated mortgage loans in the secondary market as a means of generating fee income to control the interest rate sensitivity of our balance sheet and to manage overall balance sheet mix. We hold certain fixed-rate mortgage loans for investment, consistent with our current asset/liability management strategies.

At December 31, 2016, we serviced approximately $124.7 million of residential mortgage and reverse mortgage loans for others, compared to $130.0 million at December 31, 2015. We also serviced residential mortgage loans for our own portfolio totaling $267.0 million and $259.7 million at December 31, 2016 and 2015 respectively.

 

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Our consumer lending activity is conducted mainly through our branch offices and referrals from other parts of our business. We originate a variety of consumer credit products including home improvement loans, home equity lines of credit, automobile loans, unsecured lines of credit and other secured and unsecured personal installment loans.

We offer government-insured reverse mortgages to our customers. Our activity has been limited to acting as a correspondent originator for these loans. During 2016 we originated and sold $3.1 million in reverse mortgages compared to $2.8 million during 2015.

We originate commercial real estate and commercial loans through our commercial lending division and Small Business Administration (SBA) loan program. Commercial loans are made for working capital, financing equipment acquisitions, business expansion and other business purposes. During 2016 we originated $1.1 billion of commercial and commercial real estate loans compared to $1.1 billion in 2015. To reduce our exposure on certain types of these loans, and/or to maintain relationships within internal lending limits, at times we will sell a portion of our commercial loan portfolio, typically through loan participations. Commercial loan sales totaled $43.0 million and $22.6 million in 2016 and 2015, respectively. These amounts represent gross contract amounts and do not necessarily reflect amounts outstanding on those loans. We also periodically buy loan participations from other banks. Commercial loan participation purchases totaled $51.9 million and $66.1 million in 2016 and 2015, respectively.

Any significant modification or additional exposure to one borrowing relationship exceeding $3.5 million must be approved by the Senior Management Loan Committee (SLC). The Executive Committee of the Board of Directors reviews the minutes of the SLC meetings. The Executive Committee also approves new credit exposures exceeding $10.0 million and new credit exposures in excess of $5.0 million for customers with higher risk profiles, larger existing relationship exposures, or multiple policy exceptions. Depending upon their experience and management position, individual officers of the Bank have the authority to approve smaller loan amounts. Our credit policy includes a $30 million “House Limit” to any one borrowing relationship. In rare circumstances, we will approve exceptions to the “House Limit”. Our policy allows for only 15 such relationships with an aggregate exposure of 10% of Tier I Capital plus ALLL. Currently, we have four relationships exceeding this limit. At December 31, 2016, the aggregate exposure over “House Limit” totaled 3.4% of Tier I Capital plus ALLL, and the largest single such exposure was $41.5 million. Those four relationships were approved to exceed the “House Limit” because the credit profile was deemed strong.

Fee Income from Lending Activities

We earn fee income from lending activities, including fees for originating loans, servicing loans and selling loans and loan participations. We also receive fee income for making commitments to originate construction, residential and commercial real estate loans. Additionally, we collect fees related to existing loans which include prepayment charges, late charges, assumption fees and swap fees. As part of the loan application process, the borrower also may pay us for out-of-pocket costs to review the application, whether or not the loan is closed.

Most loan fees are not recognized in our Consolidated Statements of Operations immediately, but are deferred as adjustments to yield in accordance with GAAP, and are reflected in interest income over the expected life of the loan. Those fees represented interest income of $4.2 million, $4.7 million, and $3.1 million during 2016, 2015, and 2014 respectively. Loan fee income was mainly due to fee accretion on new and existing loans (including the acceleration of the accretion on loans that paid early), loan growth and prepayment penalties. The decrease in loan fee income was concentrated in commercial mortgages and due to 2015 including a higher volume of prepayment penalty fee collection and associated acceleration of amortized fee recognition at time of loan payoff.

LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES

Our results of operations can be negatively impacted by nonperforming assets, which include nonaccruing loans, nonperforming real estate investments, other real estate owned and restructured loans. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in our opinion, collection is doubtful, or when principal or interest is past due 90 days and collateral is insufficient to cover principal and interest payments. Interest accrued, but not collected at the date a loan is placed on nonaccrual status, is reversed and charged

 

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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.

We endeavor to manage our portfolio to identify problem loans as promptly as possible and take immediate actions to minimize losses. To accomplish this, our Loan Administration and Risk Management Department monitors the asset quality of our loans and investments in real estate portfolios and reports such information to the Credit Policy, Audit and Executive Committees of the Board of Directors and the Bank’s Controller’s Department.

SOURCES OF FUNDS

We manage our liquidity risk and funding needs through our Treasury function and our Asset/Liability Committee. As a result of increased deposit growth, our loan-to-total customer funding ratio at December 31, 2016 was 96%, better than our 2016 strategic goal of 100%. We have significant experience managing our funding needs through both borrowings and deposit growth.

As a financial institution, we and the Bank have access to several sources of funding. Among these are:

 

   

Net income

 

   

Retail deposit programs

 

   

Loan repayments

 

   

FHLB borrowings

 

   

Repurchase agreements

 

   

Federal Discount Window access

 

   

Brokered deposits

 

   

Senior debt

Our branch expansion and renovation program has been focused on expanding our retail footprint in Delaware and southeastern Pennsylvania and attracting new customers in part to provide additional deposit growth. However, in recent years we have purposefully reduced reliance on higher-cost, typically single-service certificate of deposit (CD) accounts. Core customer deposit growth (deposits excluding CDs) was $733.6 million during 2016, a 22% increase over 2015 and includes the impact of our combination with Penn Liberty.

Deposits

WSFS Bank is the largest independent full-service bank and trust institution headquartered and operating in Delaware. The Bank primarily attracts deposits through its retail branch offices and loan production offices, in Delaware’s New Castle, Sussex and Kent Counties, as well as nearby southeastern Pennsylvania.

The Bank offers various deposit products to our customers, including savings accounts, demand deposits, interest-bearing demand deposits, money market deposit accounts and certificates of deposit. In addition, the Bank accepts “jumbo” certificates of deposit with balances in excess of $100,000 from individuals, businesses and municipalities in Delaware.

 

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The following table shows the maturities of certificates of deposit of $100,000 or more as of December 31, 2016:

 

(Dollars in Thousands)    December 31,  

Maturity Period

   2016  

Less than 3 months

   $ 73,656  

Over 3 months to 6 months

     39,727  

Over 6 months to 12 months

     61,598  

Over 12 months

     85,579  
  

 

 

 

Total

   $ 260,560  
  

 

 

 

Federal Home Loan Bank Advances

As a member of the FHLB, we are able to obtain FHLB advances. At December 31, 2016, we had $854.2 million in FHLB advances with a weighted average rate of 0.78%. Outstanding advances from the FHLB had rates ranging from 0.60% to 1.23% at December 31, 2016. Pursuant to collateral agreements with the FHLB, the advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. We are required to purchase and hold shares of capital stock in the FHLB in an amount at least equal to 4.00% of our borrowings from it, plus 0.10% of our member asset value. As of December 31, 2016, our FHLB stock investment totaled $38.2 million.

We received $1.6 million in dividends from the FHLB during 2016. For additional information regarding FHLB stock, see Note 11 to the Consolidated Financial Statements.

Trust Preferred Borrowings

In 2005, the Trust issued $67.0 million aggregate principal amount of Pooled Floating Rate Securities at a variable interest rate of 177 basis points over the three-month LIBOR rate. These securities are callable and have a maturity date of June 1, 2035.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

During 2016 and 2015, we purchased federal funds as a short-term funding source. At December 31, 2016, we had purchased $130.0 million in federal funds at an average rate of 0.69%, compared to $128.2 million in federal funds at a rate of 0.45% at December 31, 2015.

As December 31, 2016 and 2015, we had no securities under agreements to repurchase as a funding source.

Senior Debt

On June 13, 2016, the Company issued $100 million of senior unsecured fixed-to-floating rate notes, (the “senior unsecured notes”). The senior unsecured notes mature on June 15, 2026 and have a fixed coupon rate of 4.50% from issuance to but excluding 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.

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

 

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PERSONNEL

As of December 31, 2016, we had 1,116 full-time equivalent Associates (employees). Our Associates are not represented by a collective bargaining unit. We believe our relationship with our Associates is very good, as evidenced by our being named a “Top Workplace” by an independent survey of our Associates for the last eleven years.

REGULATION

Overview

The Company and the Bank are subject to extensive federal and state banking laws, regulations, and policies that are intended primarily for the protection of depositors. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) and the banking system as a whole, are not for the protection of our other creditors and stockholders. The Office of the Comptroller of the Currency (OCC) is the Bank’s primary regulator and the Federal Reserve is the Company’s primary regulator.

The statutes enforced by, and regulations and policies of, these agencies affect most aspects of our business, including prescribing permissible types of activities and investments, the amount of required capital and reserves, requirements for branch offices, the permissible scope of our activities and various other requirements.

The Bank’s deposits are insured by the FDIC to the fullest extent allowed by law. As an insurer of bank deposits, the FDIC promulgates regulations, conducts examinations, requires the filing of reports and generally supervises the operations of all institutions to which it provides deposit insurance.

Financial Reform Legislation

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and by various bank regulatory agencies.

In 2010, the President signed into law the Dodd-Frank Act. This Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies, including depository institutions. The law also established the Consumer Financial Protection Bureau as an independent agency within the Federal Reserve. The following aspects of the Dodd-Frank Act, among others, are related to the operations of our Bank:

 

   

The Office of Thrift Supervision, formerly the primary regulator of federal savings associations and savings and loan holding companies, was merged into the OCC and the Federal Reserve and the federal savings association charter has been preserved under OCC jurisdiction.

 

   

The Consumer Financial Protection Bureau has been established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Depository institutions of less than $10 billion in total assets, such as the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

   

The prohibition on payment of interest on demand deposits has been repealed.

 

   

Federal preemption of state laws applied to federal savings associations has been amended. Now, state law is preempted with respect to federal savings associations to the same extent such laws would be preempted with respect to a national bank. A state consumer financial law is preempted whenever it has a discriminatory intent or effect on a federal savings association compared to state-chartered institutions; prevents or significantly interferes with a federal savings association’s federal powers; or it is preempted by a federal law other than the National Bank Act. The OCC must make a preemption determination on a case-by-case basis with respect to a particular state consumer financial law or other state law with substantively equivalent terms. In addition, state consumer financial laws are no longer preempted with respect to the activities of a federal savings association’s subsidiaries.

 

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Deposit insurance coverage has been permanently increased to $250,000 per depositor per insured depository institution.

 

   

The deposit insurance assessment base has been changed to equal a depository institution’s total consolidated assets minus the sum of its average tangible equity during the assessment period.

 

   

The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base. However, the FDIC was directed to offset the effect of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

The following aspects of the Dodd-Frank Act, among others, are related to the operations of the Company:

 

   

Supervisory authority over savings and loan holding companies has been transferred to the Federal Reserve.

 

   

Leverage capital requirements and risk-based capital requirements applicable to depository institutions and bank holding companies have been extended to savings and loan holding companies following a five year grace period.

 

   

The Federal Deposit Insurance Act (FDIA) was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.

 

   

The Federal Reserve can require a grandfathered unitary savings and loan holding company that conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial activities to conduct all or part of its financial activities in an intermediate savings and loan holding company. The Federal Reserve is required to promulgate rules setting forth the criteria for when a grandfathered unitary savings and loan holding company would be required to establish an intermediate holding company, but to date it has not yet proposed any such rules.

 

   

Public companies are required to provide their shareholders with a nonbinding vote (i) at least once every three years on the compensation paid to executives, and (ii) at least once every six years on whether they should have such “say on pay” vote every one, two or three years.

 

   

Additional provisions, including some not specifically aimed at savings associations and savings and loan holding companies, nonetheless may have an impact on us.

Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. We expect that the Dodd-Frank Act will continue to increase our operating and compliance costs. Specific impacts of the Dodd-Frank Act on our current activities or new financial activities will become evident in the future, and our financial performance and the markets in which we operate will continue to depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Some aspects of the Dodd-Frank Act continue to be subject to rulemaking, making it difficult to anticipate the overall financial impact on us, our customers, or the financial industry in general.

RECENT LEGISLATION

Basel III

In 2013, the Federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision (BCBS) capital guidelines for U.S. banking organizations. Under the final rules as of January 2015, minimum requirements increased for both the quantity and quality of capital maintained by the Company and the Bank. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of total capital to risk-weighted assets of 8.0%, and required a minimum Tier 1 leverage ratio of 4.0%. The final rule also established a new capital conservation buffer, comprised of common equity Tier 1 capital, above the regulatory minimum capital requirements. The phase-in of the capital conservation buffer began on January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. For 2017, the capital conservation buffer is 1.25%. The final rules also revised the standards for an insured depository institution to be “well-capitalized” under

 

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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). As of December 31, 2016, we had approximately $67.0 million of trust preferred securities outstanding, all of which are counted as Tier 1 capital.

The phase-in period for the final rules began for us on January 1, 2015. Full compliance with all of the final rule’s requirements phased in over a multi-year schedule is required by January 1, 2019. As of December 31, 2016, the Company and the Bank met the applicable standards, and the Bank was “well-capitalized” under the prompt corrective action rules.

In 2014, the Federal banking agencies adopted a “liquidity coverage ratio” requirement (LCR) for large internationally active banking organizations, and in 2016, the agencies proposed a “net stable funding ratio” standard (NSFR) for the same group of institutions. The LCR measures an organizations’ ability to meet liquidity demands over a 30-day horizon; the NSFR would test the same capacity over a one-year horizon. Neither requirement applies directly to the Company or the Bank, but the policies embedded in them may inform the work of the examiners as they consider our liquidity.

Debit Card Interchange Fees

The Federal Reserve has issued rules under the Electronic Funds Transfer Act, as amended by the Dodd-Frank Act, to limit interchange fees that an issuer may receive or charge for an electronic debit card transaction. Under the rules, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. In addition, the rules allow for an upward adjustment of no more than one cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the rule.

In accordance with the statute, the interchange fee standards do not apply to fees charged by issuers that, together with their affiliates, have assets of less than $10.0 billion on the annual measurement date (December 31), such as the Bank, against debit accounts that they hold.

Regulation of the Company

General

The Company is a registered savings and loan holding company and is subject to the regulation, examination, supervision and reporting requirements of the Federal Reserve.

The Company is also a public company subject to the reporting requirements of the SEC. Certain reports that we file with or furnish to the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are available free of charge on the investor relations page of our website at www.wsfsbank.com by following the link, “About WSFS” followed by “Investor Relations”. The information on our website is not incorporated by reference in this Annual Report on Form 10-K.

Restrictions on Acquisitions

Federal law generally prohibits a savings and loan holding company, without prior regulatory approval, from acquiring direct or indirect control of all, or substantially all, of the assets of any other savings association or savings and loan holding company, or more than 5% of the voting shares of a savings association or savings and loan holding

 

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company. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association that is not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the Federal Reserve.

The Company is a grandfathered unitary thrift holding company, a status that allows us to acquire companies or business lines that engage in a wide range of non-banking activities. Should we lose that status, we will be constrained in our ability to acquire many non-banking companies or business lines.

Safe and Sound Banking Practices

Savings and loan holding companies and their non-bank subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices or constitute violations of laws or regulations. For example, the Federal Reserve opposes any repurchase of common stock or any other regulatory capital instrument if the repurchase would be inconsistent with the savings and loan holding company’s prospective capital needs and continued safe and sound operation. As another example, a savings and loan holding company may not impair its subsidiary savings association’s soundness by causing it to make funds available to non-depository subsidiaries or their customers if the Federal Reserve believed it not prudent to do so. The Federal Reserve can assess civil money penalties on a party for activities conducted on a knowing or reckless basis, if those activities caused more than a minimal loss to an institution or pecuniary gain to the party. The penalties can be as high as $.04 million for each day the activity continues.

Source of Strength

The Federal Reserve requires the Company to act as a source of financial strength to the Bank in the event of financial distress at the Bank. Under this standard, the Company is expected to commit resources to support the Bank, including at times when the holding company would not otherwise be inclined to do so. The Federal Reserve also expects the Company to provide managerial support to the Bank as needed. The Federal Reserve may require a savings and loan holding company to terminate an otherwise lawful activity or divest control of a subsidiary if the activity or subsidiary poses a serious risk to the financial safety, soundness, or stability of a subsidiary savings association and is inconsistent with sound banking principles.

In addition, pursuant to the Dodd-Frank Act, the capital rules for savings and loan holding companies are no less stringent than those that apply to their subsidiary savings associations.

Dividends

The principal sources of the Company’s cash are debt issuances and dividends from the Bank, supplemented by earnings from its operating subsidiaries (Cypress, Powdermill and West Capital). Our earnings and activities are affected by federal, state and local laws and regulations. For example, these include limitations on the ability of the Bank to pay dividends to the holding company and our ability to pay dividends to our stockholders. It is the policy of the Federal Reserve that holding companies should pay cash dividends on common stock only out of earnings available for the period for which the dividend is being paid and only if prospective earnings retention is consistent with the organization’s expected future capital needs and current and prospective financial condition. The policy provides that holding companies should not maintain a level of cash dividends that undermines the holding company’s ability to serve as a source of strength to its banking subsidiary. Consistent with this policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the Federal Reserve’s policy statement.

In 2009, the Federal Reserve issued a supervisory letter providing greater clarity to its policy statement on the payment of dividends by holding companies. In this letter, the Federal Reserve stated that when a holding company’s board of directors is considering the payment of dividends, it should consider, among other things, the following factors: (i) overall asset quality, potential need to increase reserves and write down assets, and concentrations of credit; (ii) potential for unanticipated losses and declines in asset values; (iii) implicit and explicit liquidity and credit

 

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commitments, including off-balance sheet and contingent liabilities; (iv) quality and level of current and prospective earnings, including earnings capacity under a number of plausible economic scenarios; (v) current and prospective cash flow and liquidity; (vi) ability to serve as an ongoing source of financial and managerial strength to depository institution subsidiaries insured by the FDIC, including the extent of double leverage and the condition of subsidiary depository institutions; (vii) other risks that affect the holding company’s financial condition and are not fully captured in regulatory capital calculations; (viii) level, composition, and quality of capital; and (ix) ability to raise additional equity capital in prevailing market and economic conditions (the Dividend Factors). It is particularly important for a holding company’s board of directors to ensure that the dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. In addition, a holding company’s board of directors should strongly consider, after careful analysis of the Dividend Factors, reducing, deferring, or eliminating dividends when the quantity and quality of the holding company’s earnings have declined or the holding company is experiencing other financial problems, or when the macroeconomic outlook for the holding company’s primary profit centers has deteriorated. The Federal Reserve further stated that, as a general matter, a holding company should eliminate, defer or significantly reduce its distributions if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition, or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that the holding company is operating in an unsafe and unsound manner.

Additionally, as discussed above, the Federal Reserve possesses enforcement powers over savings and loan holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices, or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by bank and savings and loan holding companies.

Cypress and West Capital

Cypress and West Capital are registered investment advisors under the Investment Advisers Act of 1940, as amended, and as such are supervised by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including record-keeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Noncompliance with the Investment Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.

Regulation of WSFS Bank

General

As a federally chartered savings institution the Bank is subject to regulation, examination and supervision by the OCC. The OCC conducts regular safety and soundness examinations of the Bank, which result in ratings for capital, asset quality, management, earnings, liquidity, and sensitivity to market risk and a composite rating (referred to collectively as the “CAMELS” rating.) The OCC treats the CAMELS ratings and the examination reports as highly confidential, and they are not available to the public. 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 Bank must file reports with the OCC describing its activities and financial condition, including a quarterly “call report” that is publicly available. The FDIC also has the authority to conduct special examinations of the Bank, and the CFPB has back-up enforcement authority over the Bank. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve.

 

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Transactions with Affiliates; Tying Arrangements

The Bank is subject to certain restrictions in its dealings with us and our affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act, with additional limitations found in Section 11 of the Home Owners’ Loan Act. An affiliate of a savings association, generally, is any company or entity which controls or is under common control with the savings association or any subsidiary of the savings association that is commonly controlled by an affiliate or a bank or savings association. In a holding company context, the parent holding company of a savings association (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those that would be provided to a non-affiliate. The term “covered transaction” includes the making of loans to the affiliate, purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate and several other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, the Home Owners’ Loan Act also prohibits a savings association from (i) lending or otherwise extending credit to an affiliate that engages in any activity impermissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for the purchase of shares of a subsidiary.

Restrictions also apply to extensions of credit by the Bank to its executive officers, directors, principal shareholders, and their related interests and to similar individuals at the Company and the Bank’s affiliates. In general, such extensions of credit (i) may not exceed certain dollar limitations, (ii) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (iii) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of the Bank’s Board of Directors.

The Bank may not extend credit, lease, sell property, or furnish any service or fix or vary the consideration for them on the condition that (i) the customer obtain or provide some additional credit, property, or service from or to the Bank or the Company or their subsidiaries (other than a loan, discount, deposit, or trust service or that are related to and usually provided in connection with any such product or service) or (ii) the customer not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. The Federal banking agencies have, however, allowed banks and savings associations to offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. The law authorizes the Federal Reserve to grant additional exceptions by regulation or order.

Regulatory Capital Requirements

Under revised capital regulations effective January 1, 2015 for the Bank, savings institutions must maintain “tangible” capital equal to 1.5% of average total assets, common equity Tier 1 equal to 4.5% of risk-weighted assets, Tier 1 capital equal to 6% of risk-weighted assets, total capital (a combination of Tier 1 and Tier 2 capital) equal to 8% of risk-weighted assets, and a leverage ratio of Tier 1 capital to average total consolidated assets equal to 4%. The regulations also modified the thresholds necessary for a savings association to be deemed well or adequately capitalized; these adjustments are discussed below under “Prompt Corrective Action.”

Under the revised capital rules, the components of common equity Tier 1 capital include common stock instruments (including related surplus), retained earnings, and certain minority interests in the equity accounts of fully consolidated subsidiaries (subject to certain limitations). A savings association must make certain deductions from and adjustments to the sum of these components to determine common equity Tier 1 capital The required deductions for federal savings associations include, among other items, goodwill (net of associated deferred tax liabilities), certain other intangible assets (net of deferred tax liabilities), certain deferred tax assets, gains on sale in connection with securitization exposures and investments in and extensions of credit to certain subsidiaries engaged in activities not permissible for national banks. The adjustments require several complex calculations and include adjustments to the amounts of deferred tax assets, mortgage

 

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servicing assets, and certain investments in the capital of unconsolidated financial institutions that are includable in common equity Tier 1 capital. Additional Tier 1 capital includes noncumulative perpetual preferred stock and related surplus, and certain minority interests in the equity accounts of fully consolidated subsidiaries not included in common equity Tier 1 capital (subject to certain limitations). Tier 2 capital includes subordinated debt with a minimum original maturity of five years, related surplus, certain minority interests in in the equity accounts of fully consolidated subsidiaries not included in Tier 1 capital (subject to certain limitations), and limited amounts of a bank’s allowance for loan and lease losses (ALLL). Certain deductions and adjustments are necessary for both additional Tier 1 capital and Tier 2 capital. Tangible capital has the same definition as Tier 1 capital.

The revised capital rules also modified the risk weights for several types of assets. The risk weights range from 0% for cash, U.S. government securities, and certain other assets, 50% for qualifying residential mortgage exposures, 100% for corporate exposures and non-qualifying mortgage loans and certain other assets, to 600% for certain equity exposures. Loans that are past due by 90 days or more and commercial real estate loans either with a loan-to-value ratio in excess of the supervisory ceilings or without a certain amount of contributed capital from the borrower must be risk-weighted at 150%. Mortgage servicing assets and deferred tax assets that are not deducted from common equity Tier 1 capital in accordance with the adjustment stated above are risk-weighted at 250%.

At December 31, 2016, the Bank was in compliance with the minimum common equity Tier 1 capital, Tier 1 capital, total capital, tangible capital and leverage capital requirements.

The Company is subject to similar minimum capital requirements as the Bank, except that the Company is not subject to a tangible capital ratio. As of December 31, 2016, the Company was in compliance with the minimum common equity Tier 1 capital, Tier 1 capital, total capital, and leverage capital requirements. For the Company to be “well capitalized,” the Bank must be well-capitalized and the Company must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve to meet and maintain a specific capital level for any capital measure. As of December 31, 2016, the Company met all the requirements to be deemed well-capitalized.

Prompt Corrective Action

All banks and savings associations are subject to a “prompt corrective action” regime. This regime is designed primarily to impose increasingly stringent limits on insured depository institutions as their capital deteriorates below certain levels. There are five different capital levels: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. A well-capitalized institution usually is entitled to various regulatory advantages, such as expedited treatment of applications, favorably deposit insurance assessments, and no express restrictions on brokered deposits. The revised capital rules summarized above raised the thresholds for well-capitalized status. In order to be “well capitalized”, an OCC-regulated savings association must have a common equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0%, and a 5.0% leverage ratio, and not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by the OCC. An adequately capitalized savings association must maintain a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a leverage ratio of 4.0%. If a savings association falls below any one of these floors, it becomes undercapitalized and subject to a variety of restrictions on its operations.

As of December 31, 2016, the Bank met all of the prerequisites for well-capitalized status.

Dividend Restrictions

Both OCC and Federal Reserve regulations govern capital distributions by Federal savings associations to their holding companies. Covered distributions include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings association must file a notice with the Federal Reserve at least 30 days before making any capital distribution. The association also must file an application with the OCC for approval of a capital distribution if either (1) the total capital distributions for the applicable calendar year (including the proposed capital distribution) exceed the sum of the institution’s net income for that year to date plus the

 

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institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. In certain situations, a Federal savings association may be able to file a notice with the OCC rather than an application; in other situations, no application or notice is required for the OCC, although notice to the Federal Reserve still is necessary. For the year 2016, the Bank paid dividends to the Company after receiving approval from the OCC.

The OCC may prohibit a proposed capital distribution, which would otherwise be permitted by OCC regulations, if the OCC determines that such distribution would constitute an unsafe or unsound practice.

Under federal law, an insured depository institution may not make any capital distribution if the capital distribution would cause the institution to become undercapitalized or if it is already undercapitalized. The FDIC also prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. The Bank is currently not in default in any assessment payment to the FDIC.

Insurance of Deposit Accounts

The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OCC an opportunity to take such action.

Pursuant to the Dodd-Frank Act, the FDIA was amended to increase the maximum deposit insurance amount per depositor per depository institution from $100,000 to $250,000.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments. In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.

Through June 30, 2016, the Bank’s assessment rate was based on a methodology adopted by the FDIC for the quarter beginning April 1, 2011. This methodology was in response to a provision in the Dodd-Frank Act that changed the calculation of the assessment base and that entailed changes to the risk-based pricing system. Under the methodology adopted for 2011, the assessment base became an insured depository institution’s average consolidated total assets less average tangible equity.

The overall range of initial base assessment rates was 5 basis points to 45 basis points. Institutions, such as the Bank, that are not large and highly complex institutions were placed in one of four risk categories depending on the institution’s capital level (using the same thresholds as in the prompt corrective action regime) and supervisory evaluations by the institution’s primary federal regulator. The risk category with the highest-rated and well-capitalized institutions included a range of assessment rates, and a specific rate was assigned to a particular institution based on a variety of financial factors and the institution’s component CAMELS ratings. Each of the remaining three risk categories imposed the same rate on all institutions in the category.

In April 2016, the FDIC adopted new assessment rates and a new methodology for the assignment of rates that would become effective when the reserve ratio of the Deposit Insurance Fund rose above 1.15%. This event occurred when the FDIC announced that as of June 30, 2016, the reserve ratio was 1.17%. Accordingly, for the last two quarters of 2016, the Bank’s assessment rate has been determined differently. The range of initial base assessment rates shifted down to 3 basis points to 30 basis points (subject to certain adjustments for unsecured debt and brokered deposits). Insured depository institutions other than large and highly complex institutions were assigned to one of three (rather than four) risk categories

 

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based solely on composite CAMELS rating. Each of the three risk categories has a range of rates, and the rate for a particular institution is determined based on seven financial ratios and the weighted average of its component CAMELS ratings.

Further downward adjustments of assessment rates are possible as the reserve ratio exceeds 2.0% and higher levels. Once the minimum reserve ratio of the Deposit Insurance Fund has increased to 1.35% of estimated annual insured deposits or assessment base, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

Future changes in insurance premiums could have an adverse effect on the operating expenses and results of operations and we cannot predict what insurance assessment rates will be in the future.

The FDIC may terminate the deposit insurance of any insured depository institution, including us, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. Management is not aware of any existing circumstances that would result in termination of our deposit insurance.

Reserves

Pursuant to regulations of the Federal Reserve, a savings institution must maintain reserves against its transaction accounts. During 2016, no reserves were required to be maintained on the first $15.2 million of transaction accounts, reserves of 3% were required to be maintained against the next $95.0 million of transaction accounts and a reserve of 10% was required to be maintained against all remaining transaction accounts. These percentages are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve requirement may reduce the amount of an institution’s interest-earning assets.

Consumer Protection Regulations

The Bank’s offerings of retail products and services to consumers are subject to a large number of statutes and regulations designed to protect the finances of consumers and to promote lending to various sectors of the economy and population. These laws include, but are not limited to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Truth in Savings Act, the Electronic Funds Transfer Act, and their implementing regulations. States may adopt more stringent consumer financial protection statutes that could apply to us as well. The CFPB is responsible for writing and revising the Federal regulations, but the OCC is responsible for ensuring compliance by Federal savings associations with less than $10 billion in consolidated assets, such as the Bank. State attorneys general also may file suit to enforce federal and state laws.

The CFPB has finalized a number of significant rules, including rules that affect nearly every aspect of the residential mortgage lending and servicing process, from origination through maturity or foreclosure. Among other things, the rules require home mortgage lenders to: (i) develop and implement procedures to ensure compliance with a “reasonable ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage,” in which case a rebuttable presumption exists that the creditor extending the loan has satisfied the reasonable ability to repay test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow accounts for higher-priced mortgage loans for a longer period of time.

 

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Privacy and Cybersecurity

Pursuant to Federal regulation, the ability of a savings association (as well as banks and other financial institutions) to disclose non-public information about consumers to non-affiliated third parties is limited. We must develop and disclose privacy policies and, in some situations, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The regulations affect how consumer information is transmitted through a savings association and its affiliates and conveyed to outside vendors. In addition, consumers may prevent disclosure of certain information among affiliates that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports or applications. Consumers have the ability to direct banks and other financial institutions not to share information about transactions and experiences with affiliates for the purpose of marketing products or services.

The Federal banking agencies pay close attention to the cybersecurity practices of savings associations, banks, and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council, has issued several policy statements and other guidance for banks as new cybersecurity threats arise. FFIEC has recently focused on such matters as compromised customer credentials and business continuity planning. Examinations by the banking agencies now include review of an institution’s information technology and its ability to thwart cyber attacks.

Bank Secrecy Act and Anti-Money Laundering

Savings associations, banks, and several other classes of financial institutions are subject to several regulations designed to prevent money laundering and the financing of terrorism. The principal requirements are that an institution (i) establish an anti-money laundering program that includes training and audit components; (ii) establish a “know your customer” program to confirm the identity of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities; (iii) take additional precautions for accounts sought and managed for non-U.S. persons; and (iv) perform certain verification and certification of money laundering risk for foreign correspondent banking relationships. Anti-money laundering rules and policies are developed by a bureau within the U.S. Department of the Treasury, the Financial Crimes Enforcement Network, but compliance by individual institutions is overseen by the primary federal regulators, in our case, the OCC.

Bank Secrecy Act and anti-money laundering compliance has been a special focus of the OCC and the other Federal banking agencies in recent years. Any non-compliance is likely to result in an enforcement action, often with substantial monetary penalties and reputational damage. A savings association or bank that is required to strengthen its compliance program often must put on hold any initiatives that require banking agency approval.

Community Reinvestment Act

All savings associations and banks are subject to the Community Reinvestment Act (CRA), which requires each such institution to help meet the credit needs of low- to moderate-income communities and individuals within the institution’s assessment area. CRA does not impose specific lending requirements, and it does not contemplate that an institution would take any action inconsistent with safety and soundness. The Federal banking agencies evaluate the performance of each of their regulated institutions periodically. Evaluations that result in a conclusion of “Needs to Improve” or “Unsatisfactory” may block or impede regulatory approvals for other actions by an institution.

The Bank has three assessment areas in and around Wilmington, DE. The Bank received a rating of “Satisfactory” in its most recent performance evaluation, dated Sept. 2, 2014.

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.

 

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Reconciliation of Core ROA

We prepare our financial statements in accordance with U.S. GAAP. To supplement our financial information presented in accordance with U.S. GAAP, we provide a non-GAAP financial measure, core ROA, in order to provide investors with a better understanding of the company’s performance when analyzing changes in our underlying business between reporting periods and provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making. We believe the presentation of this non-GAAP financial measure, when used in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing the company’s operating performance and underlying prospects. This analysis should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Core ROA is calculated as follows:

 

     For the year ended  
(Dollars in thousands except ratio data)    December 31, 2016  

Net income (GAAP)

   $ 64,080  

Plus: corporate development costs (after tax)

     5,828  

Less: securities gains (after tax)

     1,528  
  

 

 

 

Core net income (non-GAAP)

   $ 68,380  
  

 

 

 

Average assets

     6,042,824  

ROA (GAAP)

     1.06

Core ROA (non-GAAP)

     1.13

ITEM 1A. RISK FACTORS

As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. The risks and uncertainties described below are not the only risks we face.

We have identified our major risk categories as: market risk, credit risk, capital and liquidity risk, compliance risk, operational risk, strategic risk, reputational risk and model risk. Market risk is the risk of loss due to changes in external market factors such as interest rates. Credit risk is the risk of loss that arises when an obligor fails to meet the terms of an obligation. We are exposed to both customer credit risk, from our loans, and institutional credit risk, principally from our various business partners and counterparties. Liquidity risk is the risk that financial condition or overall safety and soundness are adversely affected by an inability, or perceived inability, to meet obligations and support business growth. Compliance risk is the risk that we fail to adequately comply with applicable laws, rules and regulations. Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (i.e., natural disasters) or compliance, reputational or legal matters and includes those risks as they relate directly to the Company as well as to third parties with whom we contract or otherwise do business. Strategic risk is the risk from changes in the business environment, improper implementation of decisions or inadequate responsiveness to changes in the business environment.

1. Market Risk

Difficult market conditions and unfavorable economic trends could adversely affect our industry and our business.

We are exposed to downturns in the Delaware, mid-Atlantic and overall U.S. economy and housing markets. While certain economic conditions in the U.S. have shown signs of improvement in recent years, economic growth has been slow and uneven as consumers continue to recover from previously high unemployment rates, lower housing values, concerns about the level of U.S. government debt and fiscal actions that may be taken to address this, as well as economic and political conditions in the global markets. Unfavorable economic trends, sustained high unemployment, and declines in real estate values can cause a reduction in the availability of commercial credit and can negatively impact the credit performance of commercial and consumer loans, resulting in increased write-downs. These negative trends can cause

 

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economic pressure on consumers and businesses and diminish confidence in the financial markets, which may adversely affect our business, financial condition, results of operations and ability to access capital. A worsening of these conditions, such as a recession or economic slowdown, would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry. In particular, we may face the following risks in connection with these events:

 

   

An increase in the number of customers unable to repay their loans in accordance with the original terms, which could result in a higher level of loan losses and provision for loan losses;

 

   

Impaired ability to assess the creditworthiness of customers as the models and approaches we use to select, manage and underwrite our customers become less predictive of future performance;

 

   

Impaired ability to estimate the losses inherent in our credit exposure as the process we use to make such estimates requires difficult, subjective and complex judgments based on forecasts of economic or market conditions that might impair the ability of our customers to repay their loans, and this estimating process becomes less accurate and thus less reliable as economic conditions worsen;

 

   

Increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to commercial credit;

 

   

Impaired ability to access the capital markets or otherwise obtain needed funding on attractive terms or at all;

 

   

Changes in the regulatory environment, including regulations promulgated or to be promulgated under the Dodd-Frank Act, could influence recognition of loan losses and our allowance for loan losses;

 

   

Downward pressure on our stock price; and

 

   

Increased competition due to intensified consolidation of the financial services industry.

Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.

Our operating income and net income depend to a significant extent on our net interest margin, which is the difference between the interest yields we receive on loans, securities and other interest-earning assets and the interest rates we pay on interest-bearing deposits and other liabilities. Net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.

We seek to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of our different types of interest-earning assets and interest-bearing liabilities, but these interest rate risk management techniques are not capable of eliminating such risks and they may not be as effective as we intend. A rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. The results of our interest rate sensitivity simulation models depend upon a number of assumptions which may prove to be inaccurate. There can be no assurance that we will be able to successfully manage our interest rate risk. In addition, increases in market interest rates and/or adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our noninterest income, as a result of reduced demand for residential mortgage loans that we pre-sell.

The market value of our investment securities portfolio may be impacted by the level of interest rates and the credit quality and strength of the underlying collateral.

Our net interest income varies as a result of changes in interest rates as well as changes in interest rates across the yield curve. When interest rates are low, borrowers have an incentive to refinance into mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our securities to experience faster prepayments. Increases in prepayments

 

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on our portfolio will cause our premium amortization to accelerate, lowering the yield on such assets. If this happens, we could experience a decrease in interest income, which may negatively impact our results of operations and financial position.

Future changes in interest rates may reduce the market value of our investment securities. In addition, our securities portfolio is subject to risk as a result of our exposure to the credit quality and strength of the issuers of the securities or the collateral backing such securities. Any decrease in the value of the underlying collateral will likely decrease the overall value of our securities, affecting equity and possibly impacting earnings.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Such events could materially and adversely affect our results of operations.

2. Credit Risk

Significant increases of nonperforming assets from the current level, or greater than anticipated costs to resolve these credits, will have an adverse effect on our earnings.

Our nonperforming assets, which consist of non-accrual loans, assets acquired through foreclosure and TDRs adversely affect our net income in various ways. We do not record interest income on nonaccrual loans and assets acquired through foreclosure. We must establish an allowance for loan losses which reserves for losses inherent in the loan portfolio that are both probable and reasonably estimable. From time to time, we also write down the value of properties in our portfolio of assets acquired through foreclosure to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to assets acquired through foreclosure. The resolution of nonperforming assets requires the active involvement of management, which can distract management from daily operations and other income producing activities. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our earnings. Significant increases in the level of our nonperforming assets from the current level, or greater than anticipated costs to resolve these credits, will have an adverse effect on our earnings.

Our loan portfolio includes a substantial amount of commercial real estate, construction and land development and commercial and industrial loans. The credit risk related to these types of loans is greater than the risk related to residential loans.

Our commercial loan portfolio includes commercial and industrial loans, commercial real estate loans and construction and land development loans. Commercial real estate loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure to pay or late payments by our customers would adversely affect our earnings. The increased credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the larger size of loan balances, and the potential that adverse changes in general economic conditions can adversely affect income-producing properties. A portion of our commercial real estate, construction and land development and commercial and industrial loan portfolios includes a balloon payment feature. A number of factors may affect a borrower’s ability to make or refinance a balloon payment, including the financial condition of the borrower, the prevailing local economic conditions and the prevailing interest rate environment.

Furthermore, commercial and industrial loans secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties, including reduction in sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where

 

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repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Concentration of loans in our primary markets may increase our risk.

Our success depends primarily on the general economic conditions and housing markets in the state of Delaware, southeastern Pennsylvania and northern Virginia, as a large portion of our loans are made to customers in these markets. This makes us vulnerable to a downturn in the local economy and real estate markets in these areas. Declines in real estate valuations in these markets would lower the value of the collateral securing those loans, which could cause us to realize losses in the event of increased foreclosures. Local economic conditions have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. In addition, weakening in general economic conditions such as inflation, recession, unemployment, natural disasters or other factors beyond our control could negatively affect demand for loans, the performance of our borrowers and our financial results.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of the loans in our portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable or incurred losses in our loan portfolio, resulting in unanticipated losses and additions to our allowance for loan losses. While we believe that our allowance for loan losses was adequate at December 31, 2016, there is no assurance that it will be sufficient to cover future loan losses, especially if there is a significant deterioration in economic conditions. Material additions to our allowance could materially decrease our net income.

3. Capital and Liquidity Risk

Our inability to grow deposits in the future could materially adversely affect our liquidity and ability to grow our business.

A key part of our future growth strategy is to grow deposits. The market for deposits is highly competitive, with intense competition in attracting and retaining deposits. We compete on the basis of the rates we pay on deposits, features and benefits of our products, the quality of our customer service and the competitiveness of our digital banking capabilities. Our ability to originate and maintain deposits is also highly dependent on the strength of the Bank and the perceptions of customers and others of our business practices and our financial health. Adverse perceptions regarding our reputation could lead to difficulties in attracting and retaining deposits accounts. Negative public opinion could result from actual or alleged conduct in a number of areas, including lending practices, regulatory compliance, inadequate protection of customer information or sales and marketing activities, and from actions taken by regulators or others in response to such conduct.

The demand for the deposit products we offer may also be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products. Competition from other financial services firms and others that use deposit funding products may affect deposit renewal rates, costs or availability. Changes we make to the rates offered on our deposit products may affect our profitability and liquidity.

The FDIA prohibits an insured bank from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is “well capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequately capitalized” and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is “well capitalized” and at December 31, 2016, the Bank met or exceeded all

 

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applicable requirements to be deemed “well capitalized” for purposes of the FDIA. However, there can be no assurance that the Bank will continue to meet those requirements. Limitations on the Bank’s ability to accept brokered deposits for any reason (including regulatory limitations on the amount of brokered deposits in total or as a percentage of total assets) in the future could materially adversely impact our funding costs and liquidity. Any limitation on the interest rates the Bank can pay on deposits could competitively disadvantage us in attracting and retaining deposits and have a material adverse effect on our business.

We could experience an unexpected inability to obtain needed liquidity.

Liquidity is essential to our business, as we use cash to fund loans and investments, other interest-earning assets and deposit withdrawals that occur in the ordinary course of our business. We also are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our principal sources of liquidity include customer deposits, FHLB borrowings, brokered certificates of deposit, sales of loans, repayments to the Bank from borrowers and paydowns and sales of investment securities. Our ability to obtain funds from these sources could become limited, or our costs to obtain such funds could increase, due to a variety of factors, including changes in our financial performance or, the imposition of regulatory restrictions on us, adverse developments in the capital markets, including weakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole. If our ability to obtain necessary funding is limited or the costs of such funding increase, our ability to meet our obligations or grow our banking business would be adversely affected and our financial condition and results of operations could be harmed.

Restrictions on our subsidiaries’ ability to pay dividends to us could negatively affect our liquidity and ability to pay dividends.

We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that our Bank and certain of our nonbank subsidiaries may pay us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our subsidiaries to pay dividends to us could have a material adverse effect on our liquidity and on our ability to pay dividends on common stock. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels; we may not be able to make dividend payments to our common stockholders.

4. Compliance Risk

We are subject to extensive regulation which could have an adverse effect on our operations.

We are subject to extensive federal and state regulation, supervision and examination governing almost all aspects of our operations. The laws and regulations governing our business are intended primarily to protect depositors, our customers, the public, the FDIC’s Deposit Insurance Fund, and the banking system as a whole, and not our shareholders or holders of our debt. Since July 21, 2011, the Federal Reserve has been the primary federal regulator for the Company and the OCC has been the Bank’s primary regulator. The banking laws, regulations and policies applicable to us govern a variety of matters, including certain debt obligations, changes in control, maintenance of adequate capital, and general business operations, including permissible types, amounts and terms of loans and investments, the amount of reserves held against deposits, restrictions on dividends, establishment of new offices and the maximum interest rate that may be charged by law. In addition, federal and state banking regulators have broad authority to supervise our banking business, including the authority to prohibit activities that represent unsafe or unsound banking practices or constitute violations of statute, rule, regulation or administrative order. Failure to appropriately comply with any such laws, regulations or regulatory policies could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could adversely affect our business, results of operations, financial condition or prospects.

 

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We are subject to changes in federal and state banking statutes, regulations and governmental policies, and their interpretation or implementation. Regulations affecting banks and other financial institutions in particular are undergoing continuous review and frequently change and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any changes in any federal and state law, as well as regulations and governmental policies could affect us in substantial and unpredictable ways, including ways that may adversely affect our business, results of operations, financial condition or prospects.

Some of the regulatory changes mandated by the Dodd Frank Act have increased our expenses, decreased our revenues and changed the activities in which we choose to engage. Some of these and other provisions of the Dodd-Frank Act remain subject to regulatory rulemaking and implementation, the effects of which are not yet known. We may be forced to invest significant management attention and resources to make any necessary changes related to the Dodd-Frank Act and any regulations promulgated thereunder, which may adversely affect our business, results of operations, financial condition or prospects. We cannot predict the specific impact and long-term effects the Dodd-Frank Act and the regulations promulgated thereunder will have on our financial performance, the markets in which we operate and the financial industry generally.

In addition to changes resulting from the Dodd-Frank Act, in July 2013, the Federal Reserve, FDIC and the OCC approved final rules (Final Capital Rules) implementing revised capital rules to reflect the requirements of the Dodd-Frank Act and the Basel III international capital standards. Under the Final Capital Rules, minimum requirements have increased both the quantity and quality of capital held by the Company. 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 Capital Rules also establish a new capital conservation buffer, comprised of common equity Tier 1 capital, is also established 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. Strict eligibility criteria for regulatory capital instruments were also implemented under the Final Capital Rules. The Final Capital Rules became applicable to us beginning on January 1, 2015 with conservation buffers phasing in over the subsequent 5 years.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports when appropriate. They also mandate that we are ultimately responsible to ensure our third party vendors adhere to the same laws and regulations. In addition to other bank regulatory agencies, the Federal Financial Crimes Enforcement Network of the Department of the Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the state and federal banking regulators, as well as the U.S. Department of Justice, Consumer Financial Protection Bureau, Drug Enforcement Administration, and Internal Revenue Service.

We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control of the Department of the Treasury regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the U.S. If our policies, procedures and systems or those of our third party vendors are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisition plans. Any of these results could have a material adverse effect on our business, financial condition, results of operations and future prospects.

 

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We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and future prospects.

The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material adverse effect on our results of operations.

The Federal Reserve regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin. Its policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any future changes may affect our business, financial condition and results of operation.

If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could negatively affect our earnings.

Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is important to client satisfaction, which in turn is important to the earnings and growth of our investment businesses. Failure to comply with these standards, adequately manage these risks or manage the differing interests often involved in the exercise of fiduciary responsibilities could also result in liability.

5. Operational Risk

Impairment of goodwill and/or intangible assets could require charges to earnings, which could negatively impact our results of operations.

Goodwill and other intangible assets arise when a business is purchased for an amount greater than the net fair value of its identifiable assets. We have recognized goodwill as an asset on the balance sheet in connection with several recent acquisitions. We evaluate goodwill and intangibles for impairment at least annually by comparing fair value to carrying amount. Although we have determined that goodwill and other intangible assets were not impaired during 2016, a significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of goodwill or other intangible assets. Any future write-down of the goodwill or intangible assets could result in a material charge to earnings.

Our results of operations and financial condition could be materially adversely affected if our Cash Connect division’s established policies, procedures and controls are inadequate to prevent a misappropriation of funds, or if a misappropriation of funds is not insured or not fully covered through insurance.

The profitability of our Cash Connect segment depends to a large degree on its ability to accurately and efficiently distribute, track, and settle large amounts of cash to its customers’ ATMs which, in turn, depends on the successful implementation and monitoring of a comprehensive series of financial and operational controls that are designed to help prevent, detect, and recover any potential loss of funds. These controls require the implementation and maintenance of complex proprietary software, the ability to track and monitor an extensive network of armored car companies, and the

 

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ability to settle large amounts of electronic funds transfers (EFT) from various ATM networks. There is a risk that those associated with armored car companies, ATM networks and processors, ATM operators, or other parties may misappropriate funds belonging to Cash Connect. Cash Connect has experienced such occurrences in the past. If our Cash Connect division’s established policies, procedures and controls are inadequate, or not properly executed to prevent or detect a misappropriation of funds, or if a misappropriation of funds is not insured or not fully covered through any insurance maintained by us, our results of operations or financial condition could be materially affected.

The value of our deferred tax assets could adversely affect our operating results and regulatory capital ratios.

Our deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes. In making this determination, we consider all positive and negative evidence available, including the impact of recent operating results, as well as potential carryback of tax to prior years’ taxable income, reversals of existing taxable temporary differences, tax planning strategies and projected earnings within the statutory tax loss carryover period. If we were to conclude that a significant portion of our deferred tax assets were not more likely than not to be realized, the required valuation allowance could adversely affect our financial position, results of operations and regulatory capital ratios. In addition, the value of our deferred tax assets could be adversely affected by a change in statutory tax rates. For example, President Trump’s administration has indicated it will propose reductions to the corporate statutory tax rate. A decline in the federal corporate tax rate may lower the Company’s tax provision expense, however, it may also significantly decrease the value of the Company’s deferred tax assets, which would result in a reduction of net income in the period in which the tax change is enacted.

Our risk management processes and procedures may not be effective in mitigating our risks

Our risk management processes and procedures seek to appropriately balance risk and return and mitigate risks. We have established processes and procedures intended to identify, measure, monitor and control material risks to which we are subject, including, for example, credit risk, market risk, liquidity risk, strategic risk and operational risk.

We seek to monitor and control our risk exposure through a framework that includes our risk appetite statement, enterprise risk assessment process, risk policies, procedures and controls, reporting requirements, credit risk culture and governance structure. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models that we use to manage these risks are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected. In addition, the information we use in managing our credit and other risk may be inaccurate or incomplete as a result of error or fraud, both of which may be difficult to detect and avoid. There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes are changed or new products and services are introduced. If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our business, results of operations and financial condition.

Litigation or legal proceedings could expose us to significant liabilities and/or damage our reputation.

From time to time we have and may become party to various litigation claims and legal proceedings. Management evaluates these claims and proceedings to assess the likelihood of unfavorable outcomes and estimates, if possible, the amount of potential losses. We may establish a reserve, as appropriate, based upon our assessments and estimates in accordance with accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on the judgment of our management with respect to those assessments, estimates and disclosures. Litigation and legal proceedings may result in the incurrence of significant liabilities, including payment of damages, fees and expenses related to the litigation, and/or penalties and fines. Further, actual outcomes or losses may differ materially from assessments and estimates, which could adversely affect our reputation, financial condition and results of operations.

WSFS Bank provides indenture trustee and loan agency services, including administrative and collateral agent fee-based services for first lien, second lien, debtor-in-possession and exit facilities, and WSFS Bank professionals work with ad hoc committees, unsecured creditors’ committees, borrowers and other professionals involved in restructuring and

 

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bankruptcy. In this capacity, in the normal course of business, WSFS Bank may be named as a party in litigation. Although WSFS Bank has no credit or direct exposure in conjunction with this administrative role, the fact that the Bank’s name appears in the case caption may create the erroneous impression that WSFS Bank may have financial exposure in such a lawsuit.

System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.

Failures in, or breaches of, our computer systems and network infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Cybersecurity breaches and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and damage to our reputation, and may discourage current and potential customers from using our Internet banking services. As customer, public and regulatory expectations regarding operational and information security have increased, we have added additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection; however, any mitigation activities may not prevent or detect future potential losses from system failures or cybersecurity breaches.

In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our customers. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. We and our third-party service providers have experienced all of these events in the past and expect to continue to experience them in the future. These events could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation, loss of customers and business or a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, we cannot be sure this will be the case in the future. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions that are designed to disrupt key business services, such as consumer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

Errors, breakdowns in controls or other mistakes in the provision of services to clients or in carrying out transactions for our own account can subject us to liability, result in losses or negatively affect our earnings in other ways.

In our asset servicing, investment management, fiduciary administration and other business activities, we effect or process transactions for clients and for us that involve very large amounts of money. Failure to properly manage or

 

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mitigate operational risks can have adverse consequences, and increased volatility in the financial markets may increase the magnitude of resulting losses. Given the high volume of transactions we process, errors that affect earnings may be repeated or compounded before they are discovered and corrected.

Our business may be adversely impacted by litigation and regulatory enforcement.

Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them. Our trust, custody and investment management businesses are particularly subject to this risk. This risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, as a publicly-held company, we are subject to the risk of claims under the federal securities laws, and volatility in our stock price and those of other financial institutions increases this risk. Actions brought against us may result in injunctions, settlements, damages, fines or penalties, which could have a material adverse effect on our financial condition or results of operations or require changes to our business. Even if we defend ourselves successfully, the cost of litigation may be substantial, and public reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or negatively impact the confidence of counterparties, rating agencies and stockholders, consequently negatively affecting our earnings. In the ordinary course of our business, we also are subject to various regulatory, governmental and enforcement inquiries, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be specifically directed at us. In enforcement matters, claims for disgorgement, the imposition of civil and criminal penalties and the imposition of other remedial sanctions are possible.

Management evaluates litigation claims and proceedings to assess the likelihood of unfavorable outcomes and estimates, if possible, the amount of potential losses. We may establish a reserve, as appropriate, based upon our assessments and estimates in accordance with accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on the judgment of our management with respect to those assessments, estimates and disclosures. Litigation and legal proceedings may result in the incurrence of significant liabilities, including payment of damages, fees and expenses related to the litigation, and/or penalties and fines. Further, actual outcomes or losses may differ materially from assessments and estimates, which could adversely affect our reputation, financial condition and results of operations.

6. Strategic Risk

Our business strategy includes significant investment in growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth and investment in infrastructure effectively.

We are pursuing a significant growth strategy for our business. Our growth initiatives have required us to recruit experienced personnel to assist in such initiatives. The failure to retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, as we expand our lending beyond our current market areas, we could incur additional risk related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.

A weak economy, low demand and competition for credit may impact our ability to successfully execute our growth plan and adversely affect our business, financial condition, results of operations, reputation and growth prospects. While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.

We regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions or other business growth initiatives or undertakings. We may not successfully identify appropriate opportunities, may not be able to negotiate or finance such activities and such activities, if undertaken, may not be successful.

 

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We have in the past and may in the future pursue acquisitions, which may disrupt our business and adversely affect our operating results, and we may fail to realize all of the anticipated benefits of any such acquisition.

We have historically pursued acquisitions, and may seek acquisitions in the future. We may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, complete proposed acquisitions, successfully integrate acquired businesses into the existing operations, or expand into new markets. Once integrated, acquired operations may not achieve levels of revenues, profitability, or productivity comparable with those achieved by our existing operations, or otherwise perform as expected.

Acquisitions involve numerous risks, including difficulties in the integration of the operations, technologies, services and products of the acquired companies, and the diversion of management’s attention from other business concerns. We may not properly ascertain all such risks prior to an acquisition or prior to such a risk impacting us while integrating an acquired company. As a result, difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition, and results of operations.

Furthermore, we must generally receive federal regulatory approval before we can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, future prospects, including current and projected capital levels, the competence, experience, and integrity of management, compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the Community Reinvestment Act, and the effectiveness of the acquiring institution in combating money laundering activities. In addition, we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. Consequently, we may not obtain regulatory approval for a proposed acquisition on acceptable terms or at all, in which case we would not be able to complete the acquisition despite the time and expenses invested in pursuing it.

We originate, sell, service and invest in reverse mortgages, which subjects us to additional risks that could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.

We originate, sell, service and invest in reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a reverse mortgage is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until the borrower dies, moves out of the home or the home is sold. A decline in the demand for reverse mortgages may reduce the number of reverse mortgages we originate, and adversely affect our ability to sell reverse mortgages in the secondary market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to maintain their property or fail to pay taxes or home insurance premiums. A general increase in foreclosure rates may adversely impact how reverse mortgages are perceived by potential customers and thus reduce demand for reverse mortgages. Finally, we could become subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or evictions of elderly homeowners. All of the above factors could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.

Key employees may be difficult to attract and retain.

Our Associates are our most important resource and, in many areas of the financial services industry, competition for qualified personnel is intense. We invest significantly in recruitment, training, development and talent management as our Associates are the cornerstone of our model. If we were unable to continue to attract and retain qualified key employees to support the various functions of our businesses, our performance, including our competitive position, could be materially adversely affected. As economic conditions improve, we may face increased difficulty in retaining top performers and critical skilled employees. If key personnel were to leave us and equally knowledgeable or skilled personnel are unavailable within the Company or could not be sourced in the market, our ability to manage our business may be hindered or impaired.

 

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7. Reputational Risk

Damage to our reputation could significantly harm our businesses.

Our ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by our reputation. Public perception of the financial services industry has declined as a result of the recent economic downturn and related government response. We face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of our information systems, and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry may have a significant adverse effect on our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses.

Our Wealth Management segment is subject to a number of risks, including reputational risk.

Our Wealth Management segment derives the majority of its revenue from noninterest income which consists of trust, investment and other servicing fees. Success in this business segment is highly dependent on reputation. Our ability to attract trust and wealth management clients is highly dependent upon external perceptions of this division’s level of service, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage the division’s and our reputation among existing customers and corporate clients, which could make it difficult for the Wealth Management segment to attract new clients and maintain existing ones. Adverse developments with respect to the financial services industry may also, by association, negatively impact the segment’s or our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Although we monitor developments for areas of potential risk to the division’s and our reputation and brand, negative perceptions or publicity could materially and adversely impact both revenue and net income.

8. Model Risk

The quantitative models we use to manage certain accounting and risk management functions may not be effective, which may cause material adverse effects on our results of operations and financial condition.

We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable and estimating the effects of changing interest rates and other market measures on our financial condition and results of operations. Our modeling methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.

As a result, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management or other business or financial decisions. Furthermore, strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses.

Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. The failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters are located in 500 Delaware Ave., Wilmington, Delaware where we lease 87,819 square feet of space. At December 31, 2016, we conducted our business through 60 full-service branches located in Delaware and southeastern Pennsylvania. Nine of our branches were owned while all other facilities were leased.

In addition to our branch network, we lease office space for four loan production offices located in Delaware, southeastern Pennsylvania and Virginia and we lease thirteen other facilities in Delaware, southeastern Pennsylvania and Nevada to house operational activities, Cash Connect and Wealth Management. At December 31, 2016, our premises and equipment had a net book value of $48.9 million. All of these properties are generally in good condition and are appropriate for their intended use.

While these facilities are adequate to meet our current needs, available space is limited and additional facilities may be required to support future expansion. However, there are no current plans to lease, purchase or construct additional administrative facilities.

For additional detail regarding our properties and equipment, see Note 8 to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 23 to the Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity and Related Stockholder Matters

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “WSFS”. At December 31, 2016, we had 1,100 registered common stockholders of record. The following table sets forth the range of high and low sales prices for the Common Stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid.

The closing market price of our Common Stock at December 31, 2016 was $46.35.

 

            Stock Price Range  
            Low      High      Dividends  

2016

     4th      $ 31.90      $ 47.64      $ 0.07  
     3rd        31.47        39.31        0.06  
     2nd        30.56        37.10        0.06  
     1st        26.40        33.71        0.06  
           

 

 

 
            $ 0.25  
           

 

 

 

2015

     4th      $ 27.51      $ 35.42      $ 0.06  
     3rd        26.26        29.44        0.05  
     2nd        23.59        27.98        0.05  
     1st        24.34        26.67        0.05  
           

 

 

 
            $ 0.21  
           

 

 

 

Share Repurchases:

Commencing in November 2015, the Company’s Board of Directors approved authorizations to purchase, in the aggregate, up to 1,492,661 shares of Common Stock.

The following table provides information regarding our purchases of Common Stock during the fourth quarter of 2016.

 

2016

   Total Number
of Shares
Purchased
     Average Price
Paid Per
Share
     Total Number of Shares
Purchased as Part of
Publicly Announced
Programs (1)
     Maximum Number
of Shares that May
Yet Be Purchased
Under the Programs (1)
 

October

     —          N/A        —          991,194  

November

     30,000        36.65        30,000        961,194  

December

     10,000        46.25        10,000        951,194  
  

 

 

    

 

 

    

 

 

    

Total

     40,000      $ 39.05        40,000     
  

 

 

    

 

 

    

 

 

    
(1) During the fourth quarter of 2015, the Board of Directors approved a stock 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.

COMPARATIVE STOCK PERFORMANCE GRAPH

The graph and table which follow show the cumulative total return on our Common Stock over the last five years compared with the cumulative total return of the Dow Jones Total Market Index and the Nasdaq Bank Index over the same period as obtained from Bloomberg L.P. Cumulative total return on our Common Stock or the indices equals the total increase in

 

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value since December 31, 2011, assuming reinvestment of all dividends paid into the Common Stock or the index, respectively. The graph and table were prepared assuming $100 was invested on December 31, 2011 in our Common Stock and in each of the indices. There can be no assurance that our future stock performance will be the same or similar to the historical stock performance shown in the graph below. We neither make nor endorse any predictions as to stock performance.

CUMULATIVE TOTAL SHAREHOLDER RETURN

COMPARED WITH PERFORMANCE OF SELECTED INDEXES

December 31, 2011 through December 31, 2016

 

LOGO

 

     December 31, 2011 through December 31, 2016
Cumulative Total Return
 
     2011      2012      2013      2014      2015      2016  

WSFS Financial Corporation

   $ 100      $ 119      $ 219      $ 219      $ 278      $ 401  

Dow Jones Total Market Index

     100        110        143        157        158        184  

Nasdaq Bank Index

     100        119        168        176        191        262  

 

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ITEM 6. SELECTED FINANCIAL DATA

 

(Dollars in thousands, except per share and branch data)   2016     2015     2014     2013     2012  

At December 31,

 

Total assets

  $ 6,756,270     $ 5,584,719     $ 4,851,749     $ 4,513,863     $ 4,372,941  

Net loans (1) (5)

    4,476,574       3,770,857       3,185,159       2,936,467       2,736,674  

Reverse mortgages

    22,583       24,284       29,298       37,328       19,229  

Investment securities (2)

    958,889       886,891       866,292       817,115       900,839  

Other investments

    41,787       30,709       23,412       36,201       31,796  

Total deposits

    4,738,438       4,016,566       3,649,235       3,186,942       3,274,963  

Borrowings (3)

    1,048,386       812,200       545,764       759,830       515,255  

Trust preferred borrowings

    67,011       67,011       67,011       67,011       67,011  

Senior debt

    152,050       53,757       53,429       53,100       52,793  

Stockholders’ equity

    687,336       580,471       489,051       383,050       421,054  

Number of full-service branches

    60       51       43       39       41  

For the Year Ended December 31,

         

Interest income

  $ 216,578     $ 182,576     $ 160,337     $ 146,922     $ 150,287  

Interest expense

    22,833       15,776       15,830       15,334       23,288  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    193,745       166,800       144,507       131,588       126,999  

Noninterest income

    102,355       88,255       78,278       80,151       86,693  

Noninterest expenses

    185,960       163,459       146,645       131,755       133,345  

Provision for loan losses

    12,986       7,790       3,580       7,172       32,053  

Provision for income taxes

    33,074       30,273       18,803       25,930       16,983  

Net Income

    64,080       53,533       53,757       46,882       31,311  

Dividends on preferred stock and accretion of discount

    —         —         —         1,633       2,770  

Net income allocable to common stockholders

    64,080       53,533       53,757       45,249       28,541  

Earnings per share allocable to common stockholders:

         

Basic

    2.12       1.88       1.98       1.71       1.09  

Diluted

    2.06       1.85       1.93       1.69       1.08  

Interest rate spread

    3.79     3.79     3.62     3.51     3.39

Net interest margin

    3.88       3.87       3.68       3.56       3.46  

Efficiency ratio

    62.18       63.52       65.76       62.42       62.19  

Noninterest income as a percentage of total revenue (4)

    34.22       34.29       34.82       37.64       40.43  

Return on average assets

    1.06       1.05       1.17       1.07       0.73  

Return on average equity

    10.03       10.24       12.21       11.60       7.66  

Return on tangible common equity (6)

    12.85       11.92       13.80       13.99       9.90  

Average equity to average assets

    10.57       10.31       10.33       8.62       9.58  

Tangible equity to assets (6)

    7.55       8.84       9.00       7.69       8.93  

Tangible common equity to assets (6)

    7.55       8.84       9.00       7.69       7.72  

Ratio of nonperforming assets to total assets

    0.60       0.71       1.08       1.06       1.43  

Ratio of allowance for loan losses to total gross loans

    0.89       0.98       1.23       1.40       1.58  

Ratio of allowances for loan losses to nonaccruing loans

    174       175       164       133       92  

Ratio of charge-offs to average gross loans

    0.25       0.29       0.18       0.33       1.49  
(1) Includes loans held for sale.
(2) Includes securities available for sale, held to maturity, and trading.
(3) Borrowings consist of FHLB advances, securities sold under agreement to repurchase and other borrowed funds.
(4) Computed on a fully tax-equivalent basis.
(5) Net of unearned income.
(6) Ratio is a non-GAAP measure. See “Reconciliation of non-GAAP financial measures included in Item 6”

 

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Reconciliation of non-GAAP financial measures included in Item 6

We prepare our financial statements in accordance with U.S. GAAP. To supplement our financial information presented in accordance with U.S. GAAP, we provide non-GAAP financial measures; return on tangible common equity, tangible equity to assets and tangible common equity to assets, in order to provide investors with a better understanding of the company’s performance when analyzing changes in our underlying business between reporting periods and provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making. We believe the presentation of these non-GAAP financial measures, when used in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing the company’s operating performance and underlying prospects. This analysis should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

 

(Dollars in thousands, except ratio data)    2016     2015     2014     2013     2012  

At December 31,

          

Period End Tangible Assets

          

Period end assets

   $ 6,765,270     $ 5,584,719     $ 4,851,749     $ 4,513,863     $ 4,372,941  

Goodwill and intangible assets

     (191,247     (95,295     (57,594     (38,979     (33,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 6,574,023     $ 5,489,424     $ 4,794,155     $ 4,474,884     $ 4,339,621  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period End Tangible Common Equity

          

Period end Stockholder’s equity

   $ 687,336     $ 580,471     $ 489,051     $ 383,050     $ 421,054  

Goodwill and intangible assets

     (191,247     (95,295     (57,594     (38,979     (33,320

Noncumulative perpetual preferred stock

     —         —         —         —         (52,624
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

   $ 496,089     $ 485,176     $ 431,457     $ 344,071     $ 335,110  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity to assets

     7.55     8.84     9.00     7.69     7.72

Period End Tangible Equity

          

Period end Stockholder’s equity

   $ 687,336     $ 580,471     $ 489,051     $ 383,050     $ 421,054  

Goodwill and intangible assets

     (191,247     (95,295     (57,594     (38,979     (33,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity

   $ 496,089     $ 485,176     $ 431,457     $ 344,071     $ 387,734  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity to assets

     7.55     8.84     9.00     7.69     8.93

Period End Tangible Income

          

GAAP net income

   $ 64,080     $ 53,533     $ 53,757     $ 46,882     $ 31,311  

Tax effected amortization of intangible assets

     1,621       1,201       820       625       643  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net tangible income

   $ 65,701     $ 54,734     $ 54,577     $ 47,507     $ 31,954  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Tangible Common Equity

          

Average stockholder’s equity

   $ 638,624     $ 522,925     $ 440,273     $ 404,029     $ 408,879  

Average goodwill and intangible assets

     (127,168     (63,887     (44,828     (34,726     (33,829

Average noncumulative perpetual preferred stock

     —         —         —         (29,627     (52,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common equity

   $ 511,456     $ 459,038     $ 395,445     $ 339,676     $ 322,649  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on tangible common equity

     12.85     11.92     13.80     13.99     9.90

ITEM 7. 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 U.S. At nearly $6.8 billion

 

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in assets and $15.7 billion in fiduciary assets, WSFS Bank is also the largest locally-managed bank and trust company headquartered in Delaware and 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 financial institutions. A fixture in the community, the Bank has been in operation for more than 185 years. In addition to its focus on stellar customer experiences, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed 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 experiences 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 December 31, 2016, we service our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage services through our retail branches and mortgage and title services through those branches and through Pennsylvania-based WSFS Mortgage. WSFS Mortgage is a mortgage banking and abstract and title company specializing in a variety of residential mortgage and refinancing solutions.

During the third quarter of 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 to the Consolidated Financial Statements.

Also during the third quarter of 2016, we acquired the assets of Powdermill Financial Solutions LLC, a multi-family office serving an affluent clientele in the local community and throughout the U.S. This acquisition aligns with our strategic plan to expand our wealth management offering and to diversify our fee-income generating business.

During the fourth quarter of 2016, we acquired the assets of West Capital Management, Inc., 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 diversify our fee-income generating business.

The Cash Connect segment is a premier provider of ATM vault cash, smart safe and cash logistics services in the United Sates. It manages over $1.0 billion in total cash and services over 20,000 non-bank ATMs and over 800 smart safes nationwide. Cash Connect 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 446 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 theft from armored courier companies and consistently has been able to recover losses through its risk management strategies, although there can be no guarantees that we will be able to recover future losses.

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through six businesses. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC (Cypress) is a registered investment advisor with $677.9 million in assets under management. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and providing current income. West Capital, a registered investment advisor with approximately $738.1 million in assets under management, is a fee-only wealth management firm

 

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which operates under a multi-family office philosophy and provides fully-customized solutions tailored to the unique needs of institutions and high net worth individuals. Christiana Trust, with $14.3 billion in assets under administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, administration, custodial and commercial domicile services to corporate and institutional clients. Powdermill is a multi-family office that specializes in providing unique, independent solutions to high net worth individuals, families and corporate executives through a coordinated, centralized approach. 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 four consolidated subsidiaries, WSFS Bank, Cypress Capital Management, LLC (Cypress), WSFS Capital Management, LLC (West Capital) and WSFS Wealth Management, LLC (Powdermill), as well as one unconsolidated subsidiary, 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).

RESULTS OF OPERATIONS

We recorded net income of $64.1 million, or $2.06 per diluted common share, for the year ended December 31, 2016, an increase of $10.6 million compared to $53.5 million, or $1.85 per diluted common share, for the year ended December 31, 2015. Results in 2016 included corporate development costs of $8.5 million compared to $7.6 million of such costs in 2015. Net interest income increased $26.9 million, primarily due to the acquisition of Penn Liberty in August 2016, in addition to the full year of results from our acquisition of Alliance in October 2015, as well as robust organic growth. The improvement in net income was partially offset by higher interest expense associated with the issuance of $100 million of unsecured senior notes in 2016. Our provision for loan loss increased $5.2 million in 2016, primarily as a result of two significant, isolated credit events in two different segments of our loan portfolio. Noninterest, or fee income, increased $14.1 million due to continued growth in wealth management and mortgage banking businesses. Finally, operating expenses increased $22.5 million in 2016, reflecting growth in ongoing operating costs from our recent acquisitions of Penn Liberty, Powdermill, West Capital and Alliance and the investment in the related infrastructure and staffing costs to support our growth.

We recorded net income of $53.5 million, or $1.85 per diluted share for the year ended December 31, 2015 a $0.2 million decrease compared to $53.8 million, or $1.93 per diluted share for the year ended December 31, 2014. Results for 2014 included a one-time tax benefit of $6.7 million, or $0.24 per diluted share and $3.6 million (pre-tax), or $0.08 per diluted share, less in corporate development expenses. Earnings for 2015 were impacted by a significant increase in net interest income driven by both organic growth and the acquisition of Alliance in October 2015. Additionally, our wealth management and mortgage banking businesses continued to see significant growth over the prior year. Offsetting the growth in net interest income was an increase to the provision for loan losses of $4.2 million for the full year 2015 compared to the full year 2014 driven by one large C&I credit that had a net charge-off of $5.7 million during 2015. Lastly, we saw an increase of $16.9 million in our operating expenses during the year, reflecting growth in ongoing operating costs from our recent acquisition of Alliance and the investment in the related infrastructure and staffing costs to support our growth.

Net Interest Income

Net interest income increased $26.9 million, or 16%, to $193.7 million in 2016 while net interest margin increased slightly to 3.88% in 2016 compared to 3.87% in 2015. The increase in net interest income was due to both organic and acquisition-related loan growth, mostly in our commercial and real estate loan portfolios.

Net interest income increased $22.3 million, or 15%, to $166.8 million in 2015 while net interest margin increased 19 basis points to 3.87% in 2015 compared to 3.68% in 2014. The increase in net interest income was due to positive

 

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performance in our portfolio of purchased loans and improvement in our balance sheet mix, as well as strong organic and acquisition growth.

The following table provides certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change (the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume.

 

Year Ended December 31,

   2016 vs. 2015     2015 vs. 2014  
(Dollars in thousands)    Volume     Yield/Rate     Net     Volume     Yield/Rate     Net  

Interest Income:

            

Commercial real estate loans

   $ 10,002     $ (486   $ 9,516     $ 8,730     $ 2,537     $ 11,267  

Residential real estate loans

     1,494       1,506       3,000       422       368       790  

Commercial loans (1)

     15,927       822       16,749       5,608       1,166       6,774  

Consumer loans

     2,888       (285     2,603       1,043       (123     920  

Loans held for sale

     10       100       110       628       (207     421  

Mortgage-backed securities

     130       1,451       1,581       636       26       662  

Investment securities (2)

     952       248       1,200       290       97       387  

Reverse mortgages

     (412     260       (152     (1,147     1,317       170  

FHLB Stock and deposits in other banks

     306       (911     (605     (20     868       848  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Favorable (unfavorable)

     31,297       2,705       34,002       16,190       6,049       22,239  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

Interest-bearing demand

     151       316       467       52       2       54  

Money market

     531       346       877       365       623       988  

Savings

     52       313       365       8       49       57  

Customer time deposits

     630       (385     245       158       (1,161     (1,003

Brokered certificates of deposits

     (91     392       301       (95     14       (81

FHLB advances

     621       1,078       1,699       87       494       581  

Trust Preferred borrowings

     (70     330       260       —         41       41  

Senior debt

     3,205       (615     2,590       —         —         —    

Other borrowed funds

     (19     272       253       (745     54       (691
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Favorable) unfavorable

     5,010       2,047       7,057       (170     116       (54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change, as reported

   $ 26,287     $ 658     $ 26,945     $ 16,360     $ 5,933     $ 22,293  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) The tax-equivalent income adjustment is related to commercial loans.
(2) The tax-equivalent income adjustment is related to municipal securities.

Net interest income attributable to yield for commercial real estate loans and commercial loans increased in 2016 when compared to 2015, continuing to reflect positive performance on purchased loans. The decrease in net interest income attributable to reverse mortgages was primarily due to loan run-off, partially offset by yield improvements driven by improved cash flow projections. Net interest income from FHLB Stock decreased in 2016 when compared to 2015 primarily due to a special one-time dividend payment of $0.8 million during 2015 which did not recur in 2016. Net interest expense related to senior debt was attributable to the issuance of $100 million of unsecured senior notes in June 2016 at an interest rate of 4.25%. The decrease in net interest expense attributable to yield for customer time deposits in 2016 when compared to 2015 reflects the run-off of older, higher-rate time deposits as a part of net interest margin management.

The increase in net interest income attributable to yield for commercial real estate loans and commercial loans in 2015 when compared to 2014 was primarily the result of positive performance on purchased loans, including one large

 

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commercial mortgage pay-off. The increase in net interest income attributable to yield for reverse mortgages was primarily due to loan maturities and pay-offs. Net interest income from FHLB Stock increased in 2015 when compared to 2014 primarily due to a special one-time dividend payment of $0.8 million during 2015. The decrease in net interest expense attributable to yield for customer time deposits in 2015 when compared to 2014 was the result of allowing older, higher-rate time deposits to run-off as a part of net interest margin management.

The following table provides information regarding the average balances of, and yields/rates on, interest-earning assets and interest-bearing liabilities during the periods indicated:

 

Year Ended December 31,

   2016     2015     2014  
(Dollars in thousands)    Average
Balance
    Interest &
Dividends
     Yield/
Rate  (1)
    Average
Balance
    Interest &
Dividends
     Yield/
Rate  (1)
    Average
Balance
    Interest &
Dividends
     Yield/
Rate  (1)
 

Assets:

                     

Interest-earning assets:

                     

Loans: (2)

                     

Commercial real estate loans

   $ 1,255,119     $ 61,705        4.92   $ 1,057,662     $ 52,189        4.93   $ 878,627     $ 40,922        4.66

Residential real estate loans

     257,148       12,327        4.79       225,462       9,327        4.14       218,901       8,537        3.90  

Commercial loans

     2,125,810       96,098        4.55       1,765,540       79,349        4.47       1,636,843       72,575        4.40  

Consumer loans

     398,226       17,640        4.43       337,146       15,037        4.46       314,010       14,117        4.50  

Loans held for sale

     40,597       1,428        3.52       36,829       1,318        3.58       22,360       897        4.01  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     4,076,900       189,198        4.66       3,422,639       157,220        4.61       3,070,741       137,048        4.46  

Mortgage-backed securities (3)

     734,631       15,754        2.14       727,999       14,173        1.95       695,306       13,511        1.94  

Investment securities (3)

     202,722       4,872        3.51       161,865       3,672        3.29       150,419       3,285        3.21  

Reverse mortgage related assets

     24,476       5,147        21.03       26,473       5,299        20.02       33,087       5,129        15.50  

Other interest-earning assets

     33,744       1,607        4.76       29,247       2,212        7.56       32,232       1,364        4.23  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     5,072,473       216,578        4.33       4,368,223       182,576        4.23       3,981,785       160,337        4.08  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Allowance for loan losses

     (38,422          (39,269          (41,298     

Cash and due from banks

     110,318            89,269            81,390       

Cash in non-owned ATMs

     554,698            412,582            370,789       

Bank owned life insurance

     95,228            79,833            67,548       

Other noninterest-earning assets

     248,529            163,491            137,907       
  

 

 

        

 

 

        

 

 

      

Total assets

   $ 6,042,824          $ 5,074,129          $ 4,598,121       
  

 

 

        

 

 

        

 

 

      

Liabilities and Stockholders’ Equity:

                     

Interest-bearing liabilities:

                     

Interest-bearing deposits:

                     

Interest-bearing demand

   $ 834,703     $ 1,136        0.14   $ 695,930     $ 669        0.10   $ 642,046     $ 615        0.10

Money market

     1,159,299       3,343        0.29       966,589       2,466        0.26       794,292       1,478        0.19  

Savings

     481,197       653        0.14       414,484       288        0.07       400,759       231        0.06  

Customer time deposits

     567,657       3,301        0.58       472,921       3,056        0.65       472,512       4,059        0.86  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing customer deposits

     3,042,856       8,433        0.28       2,549,924       6,479        0.25       2,309,609       6,383        0.28  

Brokered deposits

     172,038       988        0.57       195,454       687        0.35       222,567       768        0.35  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     3,214,894       9,421        0.29       2,745,378       7,166        0.26       2,532,176       7,151        0.28  

FHLB advances

     735,975       4,707        0.64       621,024       3,008        0.48       600,172       2,427        0.40  

Trust preferred borrowings

     67,011       1,622        2.42       67,011       1,362        2.00       67,011       1,321        1.94  

Senior debt

     108,577       6,356        5.85       53,757       3,766        7.01       53,429       3,766        7.05  

Other borrowed funds (4)

     133,486       727        0.54       134,517       474        0.35       150,174       1,165        0.78  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     4,259,943       22,833        0.54       3,621,687       15,776        0.44       3,402,962       15,830        0.46  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-bearing demand deposits

     1,087,502            884,857            718,989       

Other noninterest-bearing liabilities

     56,755            44,660            35,897       

Stockholders’ equity

     638,624            522,925            440,273       
  

 

 

        

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 6,042,824          $ 5,074,129          $ 4,598,121       
  

 

 

        

 

 

        

 

 

      

Excess of interest-earning assets over interest-bearing liabilities

   $ 812,530          $ 746,536          $ 578,823       
  

 

 

        

 

 

        

 

 

      

Net interest and dividend income

     $ 193,745          $ 166,800          $ 144,507     
    

 

 

        

 

 

        

 

 

    

Interest rate spread

          3.79          3.79          3.62
       

 

 

        

 

 

        

 

 

 
Net interest margin           3.88          3.87          3.68
       

 

 

        

 

 

        

 

 

 

 

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See “Notes”

(1) Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2) Average balances include nonperforming loans and are net of unearned income.
(3) Includes securities available for sale at fair value.
(4) Includes federal funds purchased and securities sold under agreement to repurchase.

Provision 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, which we evaluate in accordance with applicable accounting principles, as discussed further in “Nonperforming Assets”. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments. For the year ended December 31, 2016 we recorded a provision for loan losses of $13.0 million compared to $7.8 million in 2015 and $3.6 million in 2014. The increase was primarily the result of two large relationships. A $15.4 million substandard C&I loan relationship was exited during the third quarter of 2016, which resulted in a $4.2 million charge-off and $3.0 million in incremental loan loss provision in that quarter. In addition, a $4.0 million private banking credit exposure granted under a business development initiative was downgraded to non-performing status, $3.5 million of which was unsecured. This resulted in a $3.5 million charge-off and incremental loan loss provision during the fourth quarter of 2016.

Noninterest (Fee) Income

Fee income increased $14.1 million to $102.4 million in 2016 from $88.3 million in 2015. Excluding securities gains net, as shown in the table below, noninterest income increased $13.2 million, or 15%, to $100.0 million in 2016 from $86.8 million in 2015. This increase reflected both strong organic and acquisition growth.

 

     Twelve months ended  
(Dollars in thousands)    December 31,
2016
     December 31,
2015
     December 31,
2014
 

Noninterest income (GAAP)

   $ 102,355      $ 88,255      $ 78,278  

Less: Securities gains, net

     (2,369      (1,478      (1,037
  

 

 

    

 

 

    

 

 

 

Adjusted noninterest income (non-GAAP) (1)

   $ 99,986      $ 86,777      $ 77,241  
  

 

 

    

 

 

    

 

 

 
(1) The Company uses non-GAAP financial information in its analysis of its performance. The Company’s management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and changes in the periods presented. The Company’s management believes that investors may use these non-GAAP measures to analyze the Company’s performance without the impact of unusual items or events that may obscure trends in the Company’s underlying performance. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.

Credit/debit card and ATM fees increased $4.2 million, or 16%, in 2016 compared to 2015 reflecting growth as well as the impact of new products and expanded revenue sources. Wealth management income grew $3.8 million, or 17%, in 2016 compared to 2015 reflecting growth in several business lines, with particular strength in trustee securitization appointments, family office services, and financial planning. Fees from mortgage banking activities increased $1.5 million or 26% when compared to 2015 reflecting strong growth provided by WSFS Mortgage. Fees for cash management and other services in our cash connect segment increased $1.2 million, due to several new services and product enhancements. Lastly, deposit service charges increased slightly compared to 2015, primarily due to growth in deposit accounts.

Wealth management income grew $4.5 million, or 26%, in 2015 compared to 2014 reflecting growth in several business lines, with particular strength in bankruptcy administration, trustee securitization appointments and retail brokerage services. Fees from mortgage banking activities increased $1.9 million or 48% when compared to 2014 reflecting strong growth provided by WSFS Mortgage. Credit/debit card and ATM fees increased $1.6 million, or 7%, in 2015 compared to 2014 reflecting organic growth and new product offerings. Lastly, deposit service charges decreased slightly compared to 2014 due to changes in the regulatory environment and customer behavior.

 

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Noninterest Expenses

Noninterest expense in 2016 increased $22.5 million to $186.0 million from $163.5 million in 2015. Excluding the non-routine and other one-time items listed in the table below, noninterest expense increased $22.2 million, or 14%, to $177.4 million in 2016 from $155.2 million in 2015.

Noninterest expense in 2015 increased $16.9 million to $163.5 million from $146.6 million in 2014. Excluding the non-routine and other one-time items listed in the table below, noninterest expense increased $12.6 million, or 9%, to $155.2 million in 2015 from $142.6 million in 2014.

 

     Twelve months ended  
(Dollars in thousands)    December 31,
2016
     December 31,
2015
     December 31,
2014
 

Noninterest expenses (GAAP)

   $ 185,960      $ 163,459      $ 146,645  

Less: Debt extinguishment costs

     —          (651      —    

Corporate development costs (1)

     (8,529      (7,620      (4,031
  

 

 

    

 

 

    

 

 

 

Adjusted noninterest expenses (non-GAAP) (2)

   $ 177,431      $ 155,188      $ 142,614  
  

 

 

    

 

 

    

 

 

 
(1) Corporate development costs were largely attributable to our acquisitions of Penn Liberty, Powdermill and West Capital in 2016, Alliance in 2015, and FNBW in 2014.
(2) The Company uses non-GAAP financial information in its analysis of its performance. The Company’s management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and changes in the periods presented. The Company’s management believes that investors may use these non-GAAP measures to analyze the Company’s performance without the impact of unusual items or events that may obscure trends in the Company’s underlying performance. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.

Contributing to the $22.2 million increase in adjusted noninterest expense in 2016 was ongoing operating costs from the addition of Penn Liberty, Powdermill, and West Capital as well as the full year impact of the acquisition of Alliance in October 2015. Also contributing to the increase was higher compensation and related costs due to added staff to support the company’s overall growth.

The $12.6 million increase in noninterest expense in 2015 was primarily the result of increased compensation expense tied to organic and acquisition growth as well as improved core performance. Also contributing to the increase were increased operating costs to support the infrastructure from our significant organic and acquisition growth, and the ongoing operating costs from the addition of the Alliance franchise in early October 2015.

Income Taxes

We recorded $33.1 million of income tax expense for the year ended December 31, 2016 compared to income tax expense of $30.3 million and $18.8 million for the years ended December 31, 2015 and 2014, respectively. In 2013, we recorded a deferred tax asset and corresponding valuation allowance in connection with the consolidation of the reverse mortgage trust. During early 2014, this valuation allowance was removed and the consolidation resulted in a $6.7 million tax benefit in 2014. The effective tax rates for the years ended December 31, 2016, 2015 and 2014 were 34.0%, 36.1%, and 25.9%, respectively. Excluding the 2014 tax item, the effective tax rate for the year ended December 31, 2014 was 35.2%. Volatility in effective tax rates is impacted by the level of pretax income or loss, combined with the amount of tax-free income as well as the effects of stock compensation tax benefits, consistent with our adoption during 2016 of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation - Stock Compensation, Compensation - Stock Compensation (Topic 718). The provision for income taxes includes federal, state and local income taxes that are currently payable or deferred because of temporary differences between the financial reporting basis and the tax reporting basis of the assets and liabilities. For additional information, see Note 14 to the Consolidated Financial Statements.

SEGMENT INFORMATION

For financial reporting purposes, our business has three reporting segments: WSFS Bank, Cash Connect, and Wealth Management. The WSFS Bank segment provides loans and other financial products to commercial and retail customers.

 

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Cash Connect provides turnkey ATM services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry as well as smart safe and other cash logistics services in the U.S. The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients.

WSFS Bank Segment

The WSFS Bank segment income before taxes grew $14.4 million or 23%, in 2016 compared to 2015 due primarily to an increase in external net interest income of $33.9 million or 19%, reflecting positive performance in our portfolio of purchased loans, improvement in our balance sheet mix, and strong organic and acquisition growth. The increase in net interest income was partially offset by an increase in external operating expenses of $17.4 million or 14%, primarily driven by increased compensation expense tied to organic and acquisition growth as well as improved core performance and a $1.9 million increase in the provision for loan losses, primarily driven by our exit of a substandard C&I relationship and the associated charge-off. Also contributing to the increase in operating expenses were increased costs to support the infrastructure from the segment’s significant organic and acquisition growth.

The WSFS Bank segment income before taxes grew $10.2 million or 19%, in 2015 compared to 2014 due primarily to an increase in external net interest income reflecting positive performance in our portfolio of purchased loans, improvement in our balance sheet mix, as well as strong organic and acquisition growth. The increase in net interest income was partially offset by an increase in external operating expenses driven by increased compensation expense tied to organic and acquisition growth as well as improved core performance. Also contributing to the increase in operating expenses were increased costs to support the infrastructure from the segment’s significant organic and acquisition growth.

Cash Connect Segment

The Cash Connect segment income before taxes grew $0.6 million, or 8%, in 2016 compared to 2015 primarily due to a $4.7 million, or 16%, increase in external fee income reflecting overall growth of the segment’s business. The year-over-year increase in fee income was partially offset by a $2.5 million, or 14%, increase in external operating expenses primarily due to increased investments for several new services and product enhancements to our fee-based managed services and smart safe offerings which continue to both diversify and expand revenue sources. The 2016 internal operating expenses also saw a $1.4 million or 84% increase when compared to 2015. At December 31, 2016 Cash Connect had over $1.0 billion in total cash managed compared to $581 million at December 31, 2015. At year-end 2016, Cash Connect serviced over 20,000 non-bank ATMs and over 800 retail smart safes nationwide compared to 16,000 ATMS and only 100 smart safes at year-end 2015.

The Cash Connect segment income before taxes grew $0.4 million, or 7%, in 2015 compared to 2014 due primarily to a $2.7 million, or 11%, increase in external fee income reflecting growth of the segment through continued market penetration of its core business offerings of ATM vault cash and related total cash management services. The increase in fee income was partially offset by a $1.8 million, or 12%, increase in external operating expenses reflecting investments in new products and infrastructure to support growth. During 2015, Cash Connect introduced “WSFS Mobile Cash”, which allows customers to securely withdraw cash from ATMs by using our WSFS Mobile Bank App, and launched a new smart safe service that allows merchants to place their cash into a smart safe which communicates the amount of cash deposited to Cash Connect.

Wealth Management Segment

The Wealth Management segment income before taxes decreased $1.7 million, or 14% in 2016 in comparison with 2015. External fee income increased $3.9 million, or 17%, reflecting growth in several business lines as well as the positive impact of our combinations with Powdermill and West Capital. The growth in fee income was offset by (i) an increase in the provision for loan losses of $3.3 million, due to a private banking credit exposure granted under a business development initiative which resulted in a charge-off of $3.5 million and incremental loan loss provision, as well as (ii) an increase of $2.6 million or 15% in external operating expense compared to 2015, which was primarily due to higher ongoing operating expenses to support the Powdermill and West Capital acquisitions and overall business growth.

 

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The Wealth Management segment income before taxes grew $0.6 million, or 5%, in 2015 compared to 2014. External fee income grew $4.7 million, or 26%, reflecting growth in several business lines, with particular strength in bankruptcy administration, trustee securitization appointments and retail brokerage services. The growth in fee income was offset by an increase in external operating expenses primarily due to increased legal and consulting fees and higher compensation expense to support the significant growth and volume-related commissions and transaction charges. Total net interest income increased $1.1 million, or 10%, when compared to 2014, due primarily to growth in Private Banking and the partnership with WSFS Mortgage/Array Financial in the delivery of mortgage products to Private Banking clients.

Segment financial information for the years ended December 31, 2016, 2015 and 2014 is provided in Note 20 to the Consolidated Financial Statements in this report.

FINANCIAL CONDITION

Our total assets increased $1.2 billion, or 21%, to $6.8 billion as of December 31, 2016, compared to $5.6 billion as of December 31, 2015. Net loans increased $682.7 million or 19% primarily due to organic and acquisition-related growth in our loan portfolio. Cash and cash equivalents increased $260.7 million, or 46%, primarily due to cash managed by Cash Connect in non-owned ATMs, which increased $220.5 million or 46% year over year. Goodwill increased $82.3 million, or 97% in comparison with prior year, due to our acquisitions of Penn Liberty, Powdermill, and West Capital during 2016. Investment securities available for sale increased $73.5 million, primarily as a result of purchases of mortgage-backed securities which is consistent with the overall growth of our balance sheet and prudent portfolio management.

Total liabilities increased $1.1 billion during the year to $6.1 billion at December 31, 2016. This increase was primarily the result of an increase in total customer deposits of $721.9 million or 18% which includes deposits acquired from the Penn Liberty acquisition and organic core deposit growth. FHLB advances also increased $184.7 million or 28% to fund the growth in our balance sheet assets, including our loan portfolio. Senior debt increased by $98.4 million which reflects the issuance of our unsecured senior notes in June 2016.

Cash in non-owned ATMs

During 2016, cash managed by Cash Connect in non-owned ATMs increased $220.5 million, or 46%, to $698.5 million. At December 31, 2016, Cash Connect serviced over 20,000 ATMs as well as 446 WSFS-owned ATMs to serve customers in our markets.

Investment Securities, available for sale

Investment securities, available for sale increased $73.5 million to $794.5 million during 2016. This was primarily due to an increase in mortgage-backed securities. Growth of our mortgage-backed securities was consistent with prudent portfolio and net interest margin management.

Investment Securities, held to maturity

Investment securities, held to maturity decreased $1.5 million to $164.3 million during 2016. This decrease was mainly due to municipal bonds calls during 2016.

Loans held for sale

Loans held for sale are recorded at fair value and increased $13.0 million to $54.8 million primarily due to overall growth in our mortgage business.

Loans, net

Net loans increased $692.7 million, or 19%, during 2016, primarily due to organic and acquisition-related growth in our loan portfolio. Loan growth included commercial and industrial loan growth of $424.2 million, or 22%, commercial real estate growth of $196.7 million or 20%, and consumer loan growth of $90.6 million, or 25%.

 

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Reverse Mortgage Related Assets

Reverse mortgage related assets are comprised of reverse mortgage loans. For additional information on these reverse mortgage related assets, see Note 7 to the Consolidated Financial Statements.

Goodwill and Intangibles

Goodwill and intangibles increased $96.0 million during 2016, primarily as a result of our acquisitions of Penn Liberty, Powdermill, and West Capital in 2016. For additional information on goodwill and intangibles, see Note 9 to the Consolidated Financial Statements.

Customer Deposits

Customer deposits increased $739.8 million, or 19%, during 2016 to $4.6 billion. Core deposit relationships increased $733.6 million, or 22% and customer time deposits increased $6.2 million, or 1%, primarily due to organic growth as well as deposits acquired from Penn Liberty in the third quarter of 2016.

The table below depicts the changes in customer deposits during the last three years:

 

     Year Ended December 31,  
(Dollars in millions)    2016      2015      2014  

Beginning balance

   $ 3,860      $ 3,462      $ 3,018  

Interest credited

     9        7        7  

Deposit inflows (outflows), net

     731        391        437  
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 4,600      $ 3,860      $ 3,462  
  

 

 

    

 

 

    

 

 

 

Borrowings and Brokered Deposits

Borrowings and brokered deposits increased by $316.6 million during 2016. Included in the increase was a $184.7 million increase in FHLB advances, which was primarily due to loan growth and a $98.3 million increase in senior debt, reflecting our issuance of $100 million of unsecured senior notes in June 2016.

Stockholders’ Equity

Stockholders’ equity increased $106.9 million, or 18%, to $580.5 million at December 31, 2016 compared to $489.1 million at December 31, 2015. Capital in excess of par value increased $73.0 million, primarily due to stock issued to complete the Penn Liberty acquisition. Retained earnings increased $56.4 million, or 10%, to $627.1 million during 2016, primarily as a result of earnings from the year less dividends paid. These increases were partially offset by $14.3 million related to common stock share buybacks during 2016.

ASSET/LIABILITY MANAGEMENT

Our primary asset/liability management goal is to optimize long term net interest income opportunities within the constraints of managing interest rate risk, ensuring adequate liquidity and funding and maintaining a strong capital base.

In general, interest rate risk is mitigated by closely matching the maturities or repricing periods of interest-sensitive assets and liabilities to ensure a favorable interest rate spread. We regularly review our interest-rate sensitivity, and use a variety of strategies as needed to adjust that sensitivity within acceptable tolerance ranges established by management and the Board of Directors. Changing the relative proportions of fixed-rate and adjustable-rate assets and liabilities is one of our primary strategies to accomplish this objective.

 

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The matching of assets and liabilities may be analyzed using a number of methods including by examining the extent to which such assets and liabilities are “interest-rate sensitive” and by monitoring our interest-sensitivity gap. An interest-sensitivity gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing within a defined period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets repricing within a defined period.

For additional information related to interest rate sensitivity, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at December 31, 2016 are shown in the following table:

 

(Dollars in thousands)   Less than
One Year
    One to Five
Years
    Over Five
Years
    Total  

Interest-rate sensitive assets:

       

Commercial loans (2)(3)

  $ 1,567,707     $ 569,936     $ 208,587     $ 2,346,230  

Real estate loans (1) (2)

    1,009,538       444,619       228,591       1,682,748  

Mortgage-backed securities

    80,515       241,710       449,849       772,074  

Consumer loans (2)

    330,915       46,605       32,016       409,536  

Investment securities

    56,022       90,575       88,952       235,549  

Loans held for sale (2)

    54,782       —         —         54,782  

Reverse mortgage loans

    1,976       10,826       9,781       22,583  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

    3,101,455       1,404,271       1,017,776       5,523,502  
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest-rate sensitive liabilities:

       

Money market and interest-bearing demand deposits

    1,451,014       —         763,040       2,214,054  

FHLB advances

    807,325       46,911       —         854,236  

Savings accounts

    273,647       —         273,647       547,294  

Retail certificates of deposit

    221,556       180,639       3,400       405,595  

Brokered certificates of deposit

    135,514       3,287       —         138,801  

Other borrowed funds

    130,000       —         —         130,000  

Jumbo certificates of deposit

    184,517       40,991       853       226,361  

Trust preferred securities

    67,011       —         —         67,011  

Senior notes

    54,086       97,964       —         152,050  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    3,324,670       369,792       1,040,940       4,735,402  
 

 

 

   

 

 

   

 

 

   

 

 

 

Off Balance Sheet:

       

Total off balance sheet

    (75,000     50,000       25,000       —    

Excess (deficiency) of interest-rate sensitive assets over interest-rate liabilities (“interest-rate sensitive gap”)

  $ (298,215   $ 1,084,479     $ 1,836     $ 788,100  
 

 

 

   

 

 

   

 

 

   

 

 

 

One-year interest-rate sensitive assets/interest-rate sensitive liabilities

    91.03      

One-year interest-rate sensitive gap as a percent of total assets

    -4.41      
(1) Includes commercial mortgage, construction, and residential mortgage loans
(2) Loan balances exclude nonaccruing loans, deferred fees and costs
(3) Assumes two-thirds of loans in process are variable and will reprice within one-year

Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which contractually reprice within the rate period may reprice at the same price, at the same time or with the same frequency. It is also important to consider that the table represents a specific point in time. Variations can occur as we adjust our interest-sensitivity position throughout the year.

 

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To provide a more accurate position of our one-year gap, certain deposit classifications are based on the interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. For the purpose of this analysis, we estimate, based on historical trends of our deposit accounts, that 75% of our money market deposits, 50% of our interest-bearing demand deposits and 50% of our savings deposits are sensitive to interest rate changes. Accordingly, these interest-sensitive portions are classified in the “Less than One Year” category with the remainder in the “Over Five Years” category.

Deposit rates other than time deposit rates are variable. Changes in deposit rates are generally subject to local market conditions and our discretion and are not indexed to any particular rate.

NONPERFORMING ASSETS

Nonperforming assets (NPAs) include nonaccruing loans, nonperforming real estate, other real estate owned 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:

 

(Dollars in thousands)                               

At December 31,

   2016     2015     2014     2013     2012  

Nonaccruing loans:

          

Commercial

   $ 2,015     $ 5,328     $ 2,706     $ 4,305     $ 4,861  

Owner-occupied commercial

     2,078       1,091       2,475       5,197       14,001  

Commercial mortgages

     9,821       3,326       8,245       8,565       12,634  

Construction

     —         —         —         1,158       1,547  

Residential mortgages

     4,967       7,287       7,068       8,432       9,989  

Consumer

     3,995       4,133       3,557       3,293       4,728  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccruing loans

     22,876       21,165       24,051       30,950       47,760  

Other real estate owned

     3,591       5,080       5,734       4,532       4,622  

Restructured loans (1)

     14,336       13,647       22,600       12,332       10,093  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets (NPAs)

   $ 40,803     $ 39,892     $ 52,385     $ 47,814     $ 62,475  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Past due loans:

          

Residential mortgages

   $ 153     $ 251     $ —       $ 533     $ 786  

Commercial and commercial mortgages (3)

     —         17,529       —         —         —    

Consumer

     285       252       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total past due loans

   $ 438     $ 18,032     $ —       $ 533     $ 786  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of nonaccruing loans to total loans (2)

     0.51     0.56     0.75     1.05     1.73

Ratio of allowance for loan losses to gross loans (2)

     0.89       0.98       1.23       1.40       1.58  

Ratio of NPA to total assets

     0.60       0.71       1.08       1.06       1.43  

Ratio of NPA (excluding accruing TDR) to total assets

     0.39       0.47       0.61       0.79       1.20  

Ratio of loan loss allowance to nonaccruing loans

     173.77       175.27       163.93       133.26       91.96  
(1) Accruing loans only. Nonaccruing TDRs are included in their respective categories of nonaccruing loans.
(2) Total loans exclude loans held for sale.
(3) Includes owner-occupied commercial

 

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Nonperforming assets increased $0.9 million between December 31, 2015 and December 31, 2016. As a result of an increase in total assets, nonperforming assets, as a percentage of total assets, decreased from 0.71% at December 31, 2015 to 0.60% at December 31, 2016. The increase in nonperforming assets is primarily due to an increase in the Commercial mortgage category, which was partially offset by substantial decreases in most other loan categories. While acquisition activity added non-performing assets, payoffs, charge-offs and OREO sales, in addition to the changes mentioned above, more than offset these additions.

The balance of loans accruing but 90 days or greater past due, at December 31, 2016 decreased by approximately $17.6 million compared to December 31, 2015. This was due to the exit of one long time problem commercial relationship during 2016.

The following table provides an analysis of the change in the balance of nonperforming assets during the last three years:

 

      Year Ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Beginning balance

   $ 39,892      $ 52,385      $ 47,814  

Additions

     42,101        12,897        38,322  

Collections

     (28,191      (14,167      (25,111

Transfers to accrual

     (681      (95      (96

Charge-offs/write-downs

     (12,318      (11,128      (8,544
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 40,803      $ 39,892      $ 52,385  
  

 

 

    

 

 

    

 

 

 

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. 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.

At December 31, 2016, we did not have a material amount of loans not classified as non-accrual, 90 days past due or restructured where known information regarding possible credit problems caused us to have serious concerns about the borrower’s ability to comply with present loan repayment terms thereby resulting in a change of classification to non-accrual, 90 days past due or restructured.

As of December 31, 2016, we had $87.5 million of loans which, although performing at that date, required increased supervision and review. They may, depending on the economic environment and other factors, become nonperforming assets in future periods. The amount of such loans at December 31, 2015 was $79.9 million. The majority of these loans are secured by commercial real estate, with others being secured by residential real estate, inventory and receivables.

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 loan loss allowance in accordance with guidance provided in the Securities and Exchange Commission’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) there is deterioration in credit quality subsequent to acquisition for loans accounted for under ASC 310-30, 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. For additional information regarding the allowance for loan losses, see Note 6 to the Consolidated Financial Statements.

 

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The allowance for loan losses of $39.8 million at December 31, 2016 increased $0.8 million from $39.0 million at December 31, 2015 and increased $2.7 million from $37.1 million at December 31, 2014. The allowance for loan losses to total gross loans ratio was 0.89% at December 31, 2016, compared to 0.98% at December 31, 2015 and 1.23% at December 31, 2014. The following points reflect the status of key credit quality metrics and the impact of acquired loans:

 

   

Total problem loans (all criticized, classified, and non-performing loans) were 27.7% of Tier 1 Capital plus allowance for loan losses at December 31, 2016, compared to 24.1% at December 31, 2015 and 26.2% at December 31, 2014.

 

   

Nonperforming loans increased to $22.9 million at December 31, 2016 from $21.2 million at December 31, 2015 and decreased from $24.1 million at December 31, 2014.

 

   

Loans acquired with the Penn Liberty acquisition were recorded at fair value. As a result, loans increased with no corresponding increase in the allowance. This served to lower the allowance for loan losses to total gross loans. Excluding acquired loans, our allowance for loan losses to total gross loans was 1.08% at December 31, 2016.

 

   

Total loan delinquency decreased to $22.2 million and was 0.50% of total loans as of December 31, 2016, compared to $43.7 million and 1.17% of total loans as of December 31, 2015 and $17.5 million and 0.55% of total loans as of December 31, 2014.

 

   

Net charge-offs were $10.3 million for the twelve months ended December 31, 2016 compared to $10.1 million for the twelve months ended December 31, 2015 and $5.4 million for the twelve months ended December 31, 2014.

The table below represents a summary of changes in the allowance for loan losses during the periods indicated:

 

(Dollars in thousands)                               

Year Ended December 31,

   2016     2015     2014     2013     2012  

Beginning balance

   $ 37,089     $ 39,426     $ 41,244     $ 43,922     $ 53,080  

Provision for loan losses

     12,986       7,790       3,580       7,172       32,053  

Charge-offs:

          

Commercial Mortgage

     422       1,135       425       1,915       6,517  

Construction

     57       146       88       1,749      </