Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35638
WSFS FINANCIAL CORPORATION
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
22-2866913
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
500 Delaware Avenue, Wilmington, Delaware
 
19801
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
(302) 792-6000
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
 
 
Not Applicable
 
 
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),    Yes  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
 
 
 
Non-accelerated filer
 
 (Do not check if smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
The Registrant had 31,539,507 shares of common stock, par value $0.01 per share, outstanding at May 4, 2018.
 



WSFS FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
PART I. Financial Information
Page
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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

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the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
the effects of other risks and uncertainties, discussed in the Company’s Form 10-K for the year ended December 31, 2017 and other documents filed by the Company with the Securities and Exchange Commission from time to time. 
We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. The Company disclaims any duty 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 specifically required by law.

As used in this Quarterly Report on Form 10-Q, the terms "WSFS", "the Company", "registrant", "we", "us", and "our" mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Cash Connect is our registered trademark. Any other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.


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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended March 31,
 
 
2018
 
2017
(Dollars in thousands, except per share data)
 
(Unaudited)
Interest income:
 
 
 
 
Interest and fees on loans
 
$
60,465

 
$
54,681

Interest on mortgage-backed securities
 
5,399

 
4,395

Interest and dividends on investment securities:
 
 
 
 
Taxable
 
17

 
117

Tax-exempt
 
1,103

 
1,132

Other interest income
 
629

 
501

 
 
67,613

 
60,826

Interest expense:
 
 
 
 
Interest on deposits
 
5,240

 
3,075

Interest on senior debt
 
1,179

 
2,121

Interest on Federal Home Loan Bank advances
 
2,463

 
1,858

Interest on federal funds purchased and securities sold under agreements to repurchase
 
446

 
201

Interest on trust preferred borrowings
 
557

 
446

Interest on other borrowings
 
14

 
22

 
 
9,899

 
7,723

Net interest income
 
57,714

 
53,103

Provision for loan losses
 
3,650

 
2,162

Net interest income after provision for loan losses
 
54,064

 
50,941

Noninterest income:
 
 
 
 
Credit/debit card and ATM income
 
9,805

 
8,131

Investment management and fiduciary income
 
9,189

 
8,039

Deposit service charges
 
4,630

 
4,397

Mortgage banking activities, net
 
1,737

 
1,185

Securities gains, net
 
21

 
320

Unrealized gains on equity investments
 
15,346

 

Loan fee income
 
599

 
549

Bank owned life insurance income
 
232

 
275

Other income
 
5,908

 
5,196

 
 
47,467

 
28,092

Noninterest expense:
 
 
 
 
Salaries, benefits and other compensation
 
29,853

 
28,836

Occupancy expense
 
5,248

 
5,162

Equipment expense
 
3,089

 
3,124

Data processing and operations expenses
 
1,907

 
1,618

Professional fees
 
1,725

 
1,635

Marketing expense
 
758

 
624

FDIC expenses
 
599

 
529

Loan workout and OREO expenses
 
426

 
521

Corporate development expense
 

 
338

Recovery of fraud loss
 
(1,665
)
 

Other operating expense
 
11,472

 
9,119

 
 
53,412

 
51,506

Income before taxes
 
48,119

 
27,527

Income tax provision
 
10,769

 
8,590

Net income
 
$
37,350

 
$
18,937

Earnings per share:
 
 
 
 
Basic
 
$
1.19

 
$
0.60

Diluted
 
$
1.16

 
$
0.59

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

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
(Dollars in thousands)
 
(Unaudited)
Net Income
 
$
37,350

 
$
18,937

Other comprehensive (loss) income:
 
 
 
 
Net change in unrealized (loss) gains on investment securities available for sale
 
 
 
 
Net unrealized (loss) gains arising during the period, net of tax expense of $3,714 and $779, respectively
 
(11,827
)
 
1,272

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $5 and $114, respectively
 
(16
)
 
(206
)
 
 
(11,843
)
 
1,066

Net change in securities held to maturity
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $37 and $59, respectively
 
(119
)
 
(101
)
Net change in unfunded pension liability
 
 
 
 
Change in unfunded pension liability related to unrealized gain (loss), prior service cost and transition obligation, net of tax benefit of ($11) and ($12), respectively
 
59

 
(23
)
Net change in cash flow hedge
 
 
 
 
Net unrealized loss arising during the period, net of tax benefit of ($240) and ($69), respectively
 
(765
)
 
(112
)
Total other comprehensive (loss) income
 
(12,668
)
 
830

Total comprehensive income
 
$
24,682

 
$
19,767

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

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
 
March 31, 2018
 
December 31, 2017
(Dollars in thousands, except per share and share data)
 
(Unaudited)
 
 
Assets:
 
 
 
 
Cash and due from banks
 
$
128,799

 
$
122,141

Cash in non-owned ATMs
 
577,561

 
598,117

Interest-bearing deposits in other banks including collateral of $4,500 and $3,380 at March 31, 2018 and December 31, 2017, respectively
 
4,729

 
3,608

Total cash and cash equivalents
 
711,089

 
723,866

Investment securities, available for sale (amortized cost of $933,678 at March 31, 2018 and $847,791 at December 31, 2017)
 
907,818

 
837,499

Investment securities, held to maturity-at cost (fair value of $159,164 at March 31, 2018 and $162,853 at December 31, 2017)
 
159,672

 
161,186

Other investments
 
33,363

 
17,971

Loans, held for sale at fair value
 
15,937

 
31,055

Loans, net of allowance for loan losses of $40,810 at March 31, 2018 and $40,599 at December 31, 2017
 
4,805,758

 
4,776,318

Bank owned life insurance
 
5,746

 
102,958

Stock in Federal Home Loan Bank of Pittsburgh at cost
 
28,854

 
31,284

Other real estate owned
 
2,567

 
2,503

Accrued interest receivable
 
19,969

 
19,405

Premises and equipment
 
48,168

 
47,983

Goodwill
 
166,007

 
166,007

Intangible assets
 
21,783

 
22,437

Other assets
 
61,200

 
59,068

Total assets
 
$
6,987,931

 
$
6,999,540

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
1,372,271

 
$
1,420,760

Interest-bearing
 
3,830,244

 
3,826,844

Total deposits
 
5,202,515

 
5,247,604

Federal funds purchased
 
125,000

 
28,000

Federal Home Loan Bank advances
 
587,162

 
710,001

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
98,225

 
98,171

Other borrowed funds
 
54,799

 
34,623

Accrued interest payable
 
3,450

 
1,037

Other liabilities
 
103,490

 
88,748

Total liabilities
 
6,241,652

 
6,275,195

Stockholders’ Equity:
 
 
 
 
Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,394,559 at March 31, 2018 and 56,279,527 at December 31, 2017
 
564

 
563

Capital in excess of par value
 
339,829

 
336,271

Accumulated other comprehensive loss
 
(20,820
)
 
(8,152
)
Retained earnings
 
704,081

 
669,557

Treasury stock at cost, 24,391,145 shares at March 31, 2018 and 24,861,145 shares at December 31, 2017
 
(277,375
)
 
(273,894
)
Total stockholders’ equity
 
746,279

 
724,345

Total liabilities and stockholders’ equity
 
$
6,987,931

 
$
6,999,540

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

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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share and share amounts)
 
Shares
 
Common Stock
 
Capital in Excess of Par Value
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Stockholders' Equity
Balance, December 31, 2016
 
55,995,219

 
$
580

 
$
329,457

 
$
(7,617
)
 
$
627,078

 
$
(262,162
)
 
$
687,336

Net Income
 

 

 

 

 
18,937

 

 
18,937

Other comprehensive income
 

 

 

 
830

 

 

 
830

Cash dividend, $0.06 per share
 

 

 

 

 
(2,199
)
 

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

 
1

 
1,093

 

 

 

 
1,094

Stock-based compensation expense
 

 

 
821

 

 

 

 
821

Repurchase of common stock, 62,000 shares
 

 

 

 

 

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

 
$
581

 
$
331,371

 
$
(6,787
)
 
$
643,816

 
$
(264,980
)
 
$
704,001

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
56,279,527

 
$
563

 
$
336,271

 
$
(8,152
)
 
$
669,557

 
$
(273,894
)
 
$
724,345

Net Income
 

 

 

 

 
37,350

 

 
37,350

Other comprehensive loss
 

 

 

 
(12,668
)
 

 

 
(12,668
)
Cash dividend, $0.09 per share
 

 

 

 

 
(2,826
)
 

 
(2,826
)
Issuance of common stock including proceeds from exercise of common stock options
 
115,032

 
1

 
2,612

 

 

 

 
2,613

Stock-based compensation expense
 

 

 
946

 

 

 

 
946

Repurchase of common stock, 70,000 shares
 

 

 

 

 

 
(3,481
)
 
(3,481
)
Balance, March 31, 2018
 
56,394,559

 
$
564

 
$
339,829

 
$
(20,820
)
 
$
704,081

 
$
(277,375
)
 
$
746,279



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



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WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net Income
 
$
37,350

 
$
18,937

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
3,650

 
2,162

Depreciation of premises and equipment, net
 
2,083

 
2,190

Amortization of fees and discounts, net
 
3,298

 
4,742

Amortization of intangible assets
 
633

 
857

Gain on mortgage banking activities, net
 
(1,737
)
 
(1,185
)
Gain on sale of securities, net
 
(21
)
 
(320
)
Loss on sale of other real estate owned and valuation adjustments, net
 
4

 
39

Deferred income tax expense
 
2,269

 
3,190

(Increase) decrease in accrued interest receivable
 
(564
)
 
315

Decrease (increase) in other assets
 
530

 
(1,838
)
Origination of loans held for sale
 
(76,962
)
 
(85,833
)
Proceeds from sales of loans held for sale
 
90,433

 
105,436

Stock-based compensation expense
 
946

 
821

Unrealized gain on equity securities
 
(15,346
)
 

Increase in accrued interest payable
 
2,413

 
1,780

Increase (decrease) in other liabilities
 
13,799

 
(1,537
)
Decrease (increase) in value of bank owned life insurance
 
783

 
(275
)
Increase in capitalized interest, net
 
(1,087
)
 
(1,316
)
Net cash provided by operating activities
 
$
62,474

 
$
48,165

Investing activities:
 
 
 
 
Repayments, maturities and calls of investment securities held to maturity
 
1,035

 
250

Sale of investment securities available for sale
 
7,012

 
263,015

Purchases of investment securities available for sale
 
(113,451
)
 
(375,687
)
Repayments of investment securities available for sale
 
19,989

 
119,313

Proceeds from BOLI surrender
 
96,429

 

Net increase in loans
 
(34,046
)
 
(106,933
)
Purchases of stock of Federal Home Loan Bank of Pittsburgh
 
(49,391
)
 
(54,990
)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh
 
51,821

 
73,236

Sales of other real estate owned
 
2,098

 
1,707

Investment in premises and equipment
 
(2,267
)
 
(2,480
)
Net cash used for investing activities
 
$
(20,771
)
 
$
(82,569
)

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Three Months Ended March 31,
 
 
2018
 
2017
(Dollars in thousands)
 
(Unaudited)
Financing activities:
 
 
 
 
Net (decrease) increase in demand and saving deposits
 
$
(62,086
)
 
$
508,429

Increase (decrease) in time deposits
 
13,045

 
(22,998
)
Increase in brokered deposits
 
24,094

 
137,797

Decrease in loan payable
 

 
(420
)
Receipts from FHLB advances
 
41,376,732

 
42,415,835

Repayments of FHLB advances
 
(41,499,571
)
 
(42,971,976
)
Receipts from federal funds purchased and securities sold under agreement to repurchase
 
8,197,250

 
6,688,000

Repayments of federal funds purchased and securities sold under agreement to repurchase
 
(8,100,250
)
 
(6,683,000
)
Dividends paid
 
(2,826
)
 
(2,199
)
Issuance of common stock and exercise of common stock options
 
2,613

 
1,094

Purchase of treasury stock
 
(3,481
)
 
(2,818
)
Net cash (used for) provided by financing activities
 
$
(54,480
)
 
$
67,744

(Decrease) increase in cash and cash equivalents
 
(12,777
)
 
33,340

Cash and cash equivalents at beginning of period
 
723,866

 
821,923

Cash and cash equivalents at end of period
 
$
711,089

 
$
855,263

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
     Interest
 
$
7,486

 
$
5,943

     Income taxes
 
2,267

 
(1,199
)
Non-cash information:
 
 
 
 
Loans transferred to other real estate owned
 
2,166

 
1,737

Loans transferred to portfolio from held-for-sale at fair value
 
(1,750
)
 
6,470

Net change in accumulated other comprehensive income
 
(12,668
)
 
830

Goodwill adjustments, net
 

 
(1,579
)
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

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WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(UNAUDITED)
1. BASIS OF PRESENTATION
General
Our unaudited Consolidated Financial Statements include the accounts of WSFS Financial Corporation (the Company or WSFS), Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), WSFS Wealth Management, LLC (Powdermill), WSFS Capital Management, LLC (West Capital), Cypress Capital Management, LLC (Cypress) and Christiana Trust Company of Delaware (Christiana Trust DE). We also have one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has three wholly-owned subsidiaries: WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC.
Overview
Founded in 1832, the Bank is one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers. The Federal Deposit Insurance Corporation (FDIC) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.
In preparing the unaudited Consolidated Financial Statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Amounts subject to significant estimates include the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, and other-than-temporary impairment (OTTI). Among other effects, changes to these estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.
Our accounting and reporting policies conform to Generally Accepted Accounting Principles (GAAP) in the U.S., prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2018. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report on Form 10-K) that was filed with the SEC on March 1, 2018 and is available at www.sec.gov or on our website at http://investors.wsfsbank.com/financials.cfm. All significant intercompany transactions were eliminated in consolidation.
Significant Accounting Policies:
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2017 Annual Report on Form 10-K. Those significant accounting policies are unchanged at March 31, 2018 except as described below:
Equity Securities
We account for our investments in equity securities in accordance with ASC 321-10 "Investments - Equity Securities." Our equity securities are classified into two categories and accounted for as follows:

Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. Any dividends received are recorded in interest income.
Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any dividends received are recorded in interest income.

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Equity investments include our investment in Visa Class B shares and certain other equity investments. The fair value of equity investments with readily determinable fair values is primarily obtained from third-party pricing services. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value to evaluate the observed transaction(s) and adjust the fair value of the equity investment.
ASC 321-10 also provides guidance related to accounting for impairment of equity securities without readily determinable fair values. The qualitative assessment to determine whether impairment exists requires the use of our judgment in certain circumstances. If, after completing the qualitative assessment we conclude an equity investment without a readily determinable fair value is impaired, a loss for the difference between the equity investment’s carrying value and its fair value may be recognized as a reduction to noninterest income in the Consolidated Statements of Income.
Senior Debt
On September 1, 2017, we redeemed $55.0 million in aggregate principal amount of our 6.25% senior notes due 2019 which were issued in 2012 (the 2012 senior notes). The 2012 senior notes were repaid using a portion of the proceeds from our 2016 issuance of senior unsecured fixed-to-floating rate notes (the 2016 senior notes). We recorded noninterest expense of $0.7 million due to the write-off of unamortized debt issuance costs in connection with this redemption.

RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2018
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Gross versus Net), which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers and 2016-12, Narrow-Scope Improvements and Practical Expedients, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates were effective for public business entities annual and interim reporting periods in fiscal years beginning after December 15, 2017. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Company adopted the standard on January 1, 2018. Consistent with the transition guidance in ASC 606, results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC 606, while prior period amounts are reported in accordance with ASC 605. For revenue streams determined to be within the scope of the new standard, we concluded that the adoption of the standard did not have a material effect on our Consolidated Financial Statements at the time of adoption. See Note 2 for additional disclosures resulting from our adoption of this standard.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard requires retrospective application for equity investments with readily determinable fair values and prospective application for equity investments without readily determinable fair values. The Company adopted the standard on January 1, 2018 on a prospective basis for its equity investments without readily determinable fair values, and the adoption of the standard did not have an effect on our Consolidated Financial Statements at the time of adoption. Subsequent to the filing of our 2017 Annual Report on Form 10-K, we identified observable transactions related to an equity investment without a readily determinable fair value. These identified, observable transactions required the revaluation of this equity investment. The results of the revaluation was recorded in the Consolidated Statement of Income. See Note 11 for further information.


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In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 represents the Emerging Issues Task Force’s final consensus on eight issues related to the classification of cash payments and receipts in the statement of cash flows for a number of common transactions. The consensus also clarifies when identifiable cash flows should be separated versus classified based on their predominant source or use. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2018 on a retrospective basis and the adoption did not have an effect on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a new, two-step framework for determining whether a transaction is accounted for as an acquisition (or disposal) of assets or a business. The first step is evaluating whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the transaction is not considered a business. Also, in order to be considered a business, the transaction would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for public entities in annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or been made available for issuance. The Company adopted this standard on January 1, 2018 on a prospective basis with no impact to its Consolidated Financial Statements at the time of adoption.

In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides clarification of the scope of ASC 610-20. Specifically, the new guidance clarifies that ASC 610-20 applies to nonfinancial assets which do not meet the definition of a business or not-for-profit activity. Further, the new guidance clarifies that a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset which is defined as a financial asset promised to a counterparty in a contract where substantially all of the assets promised are nonfinancial. Finally, the new guidance clarifies that each distinct nonfinancial asset and in-substance nonfinancial asset should be derecognized when the counterparty obtains control of it. The guidance is effective in annual and interim reporting periods in fiscal years beginning after December 15, 2017. Early application is permitted for all entities, but not before annual reporting periods beginning after December 15, 2016. The Company adopted this standard on January 1, 2018 on a modified retrospective basis and the adoption did not have an effect on its Consolidated Financial Statements at the time of adoption.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires that the service cost component of net periodic pension cost be disclosed with other compensation costs in the income statement. For all other cost components, an entity must either separately disclose the other cost components in separate line item(s) outside a subtotal of income from operations in the income statement or disclose the line item(s) used to present the other cost components in the income statement. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company adopted this standard on January 1, 2018 on a retrospective basis with no impact to its Consolidated Financial Statements at the time of adoption.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting. The new guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the award’s fair value, vesting conditions and classification remain the same immediately before and after the change, modification accounting is not applied. Additionally, the guidance does not require valuation before or after the change if the change does not affect any of the inputs to the model used to value the award. The guidance is effective in annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The new guidance will be applied on a prospective basis to awards modified on or after the adoption date. The Company adopted this standard on January 1, 2018 on a prospective basis with no impact to its Consolidated Financial Statements at the time of adoption.

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Accounting Guidance Pending Adoption at March 31, 2018

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. Adoption using the modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company does not plan to early adopt this guidance. The Company is in the process of identifying our complete lease population as defined by this guidance and expects to complete this analysis in the second quarter. The Company continues to evaluate our internal systems, accounting policies, processes and related internal controls for potential impacts. To date, our preliminary review suggests that adoption will result in additional assets and liabilities on our Consolidated Statement of Financial Condition which may require modification of the Company's internal systems, accounting policies, processes and related internal controls to allow for the calculation of the lease liability and right-of-use asset as required by this guidance. The Company will adopt this guidance on January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not plan to early adopt this guidance. The Company's cross-functional team from Finance, Credit and IT are leading the implementation efforts to evaluate the impact of this guidance on its Consolidated Financial Statements, internal systems, accounting policies, processes and related internal controls. To date, our preliminary review of this guidance suggests that adoption may materially increase the allowance for loan losses and decrease capital levels; however, the extent of these impacts will depend on the asset quality of the portfolio and significant estimates and judgments made by management at the time of adoption. The team is currently completing due diligence on acceptable methodologies under the guidance and potential software solutions which could support the methodologies. The Company will adopt this guidance on January 1, 2020.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill impairment by removing the hypothetical purchase price allocation. The new guidance requires an impairment of goodwill be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, up to the amount of goodwill recorded. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The new guidance requires the amortization period for certain non-contingent callable debt securities held at a premium to end at the earliest call date of the debt security. If the call option is not exercised at the earliest call date, the guidance requires the debt security's effective yield to be reset based on the contractual payment terms of the debt security. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Use of the modified retrospective method, with a cumulative-effect adjustment to retained earnings, is required. In the period of adoption, a change in accounting principle disclosure is required. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new guidance changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Specifically, the guidance eliminates the requirement to separately measure and report hedge ineffectiveness and also aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the new guidance provides entities the ability to apply hedge accounting to additional hedging strategies. The guidance is effective in annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.



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2. NONINTEREST INCOME

We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The standard applies to certain revenue streams included in noninterest income on our unaudited Consolidated Statements of Income, discussed in more detail below. See Note 1 for further information about our adoption of ASU 2014-09, and Note 13 for further information about the disaggregation of noninterest income by segment.
Credit/debit card and ATM income
The following table presents the components of credit/debit card and ATM income:
 
Three Months Ended March 31,
 
2018
 
2017
Bailment fees
$
6,093

 
$
4,703

Interchange fees
3,460

 
3,198

Other card and ATM fees
252

 
230

     Total credit/debit card and ATM income
$
9,805

 
$
8,131

Credit/debit card and ATM income is primarily composed of bailment fees which are earned from bailment arrangements with our customers. Bailment arrangements are legal relationships in which property is delivered to another party's temporary custody and control without a transfer of ownership. The party receiving the property (the bailee) has possession and control of the property and is obligated to take reasonable care of the property. The party who transferred the property (the bailor) retains ownership interest of the property. In the event that the bailee files for bankruptcy protection, the property is not included in the bailee's assets. The bailee pays an agreed-upon fee for the use of the bailor's property in exchange for the bailor allowing use of the assets at the bailee's site. Bailment fees are earned from cash that is owned by WSFS but available for customers' use at an offsite location, such as cash located in an ATM at a customer's place of business. This revenue stream generates fee income through monthly billing for bailment services.
Credit/debit card and ATM income also includes interchange fees. Interchange fees are paid by a merchant's bank to a bank that issued the debit or credit card used in a transaction to compensate the issuing bank for the value and benefit the merchant receives from accepting electronic payments. These revenue streams generate fee income at the time a transaction occurs and are recorded as revenue at the time of the transaction.
Investment management and fiduciary income
The following table presents the components of investment management and fiduciary income:
 
Three Months Ended March 31,
 
2018
 
2017
Trust fees
$
5,248

 
$
4,296

Wealth management and advisory fees
3,941

 
3,743

     Total investment management and fiduciary income
$
9,189

 
$
8,039

Investment management and fiduciary income is primarily composed of trust fees and wealth management fees. Trust fees are based on revenue earned from investment and trustee services to families and individuals across the U.S.; custody, escrow and trustee services on structured finance transactions; indenture trustee, administrative agent and collateral agent services to institutions and corporations; and commercial domicile and independent director services. Most fees are flat fees, except for a portion of personal and corporate trustee fees where we earn a percentage of assets under management. This revenue stream primarily generates fee income through monthly, quarterly and annual billing for services provided.
Wealth management fees consists of fees from Cypress Capital, West Capital, Powdermill, Wealth Client Management and WSFS Investment Group (WIG). Wealth management fees are based on revenue earned from services including asset management, financial planning, family office, and brokerage.  The fees are based on the market value of assets, are assessed as a flat fee, or are brokerage commissions. This revenue stream primarily generates fee income through quarterly and annual billing for the services.


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Deposit service charges
The following table presents the components of deposit service charges:
 
Three Months Ended March 31,
 
2018
 
2017
Service fees
$
2,580

 
$
2,396

Return and overdraft fees
1,884

 
1,845

Other deposit service fees
166

 
156

     Total deposit service charges
$
4,630

 
$
4,397

Deposit service charges includes revenue earned from our core deposit products, certificates of deposit, and brokered deposits. We generate revenues from deposit service charges primarily through service charges and overdraft fees. Service charges consist primarily of monthly account maintenance fees, cash management fees, foreign ATM fees and other maintenance fees. All of these revenue streams generate fee income through service charges for monthly account maintenance and similar items, transfer fees, late fees, overlimit fees, and stop payment fees. Revenue is recorded at the time of the transaction.
Other income
The following table presents the components of other income:
 
Three Months Ended March 31,
 
2018
 
2017
Managed service fees
2,826

 
2,619

Currency preparation
725

 
683

ATM insurance
590

 
697

Miscellaneous products and services
1,767

 
1,197

Total other income
$
5,908

 
$
5,196

Other income primarily consists of managed services, currency preparation, ATM insurance and other miscellaneous products and services offered by the Bank. These fees are primarily generated through monthly billings or at the time of the transaction.
Arrangements with multiple performance obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.
Practical expedients and exemptions
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.


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Table of Contents

3. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
 
 
Three Months Ended March 31,
(Dollars and shares in thousands, except per share data)
2018
 
2017
Numerator:
 
 
 
Net income
$
37,350

 
$
18,937

Denominator:
 
 
 
Weighted average basic shares
31,426

 
31,407

Dilutive potential common shares
834

 
942

Weighted average fully diluted shares
32,260

 
32,349

Earnings per share:
 
 
 
Basic
$
1.19

 
$
0.60

Diluted
$
1.16

 
$
0.59

Outstanding common stock equivalents having no dilutive effect
88

 
22


4. INVESTMENT SECURITIES
The following tables detail the amortized cost and the estimated fair value of our investments in available-for-sale and held-to-maturity debt securities as well as our equity investments. None of our investments in debt securities are classified as trading.
 
 
March 31, 2018
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Available-for-Sale Debt Securities(1)
 
 
 
 
 
 
 
 
CMO
 
$
277,079

 
$
5

 
$
7,848

 
$
269,236

FNMA MBS
 
523,676

 
71

 
14,747

 
509,000

FHLMC MBS
 
99,860

 
3

 
2,564

 
97,299

GNMA MBS
 
33,063

 
149

 
929

 
32,283

 
 
$
933,678

 
$
228

 
$
26,088

 
$
907,818

Held-to-Maturity Debt Securities
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
159,672

 
$
310

 
$
818

 
$
159,164

 
 
 
 
 
 
 
 
 
Equity Investments (2)
 
 
 
 
 
 
 
 
Visa Class B shares
 
$
14,100

 
$
15,346

 
$

 
$
29,446

Other equity investments
 
3,947

 

 
30

 
3,917

 
 
$
18,047

 
$
15,346

 
$
30

 
$
33,363

(1) 
Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $1.5 million at March 31, 2018 related to securities transferred, which are offset in Accumulated other comprehensive loss, net of tax.
(2) 
Equity investments are included in Other investments in the unaudited Consolidated Statements of Financial Condition.


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Table of Contents

 
 
December 31, 2017
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
Available-for-Sale Debt Securities(1)
 
 
 
 
 
 
 
 
CMO
 
$
250,592

 
$
88

 
$
4,141

 
$
246,539

FNMA MBS
 
479,218

 
941

 
6,172

 
473,987

FHLMC MBS
 
88,681

 
118

 
924

 
87,875

GNMA MBS
 
29,300

 
209

 
411

 
29,098

 
 
$
847,791

 
$
1,356

 
$
11,648

 
$
837,499

Held-to-Maturity Debt Securities
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
161,186

 
$
1,758

 
$
91

 
$
162,853

 
 
 
 
 
 
 
 
 
Equity Investments (2)
 
 
 
 
 
 
 
 
Visa Class B shares
 
$
14,048

 
$

 
$

 
$
14,048

Other equity investments
 
3,943

 

 
20

 
3,923

 
 
$
17,991

 
$

 
$
20

 
$
17,971

(1) 
Held-to–maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $1.6 million at December 31, 2017 related to securities transferred, which are offset in Accumulated other comprehensive loss, net of tax.
(2) 
Equity investments are included in Other investments in the unaudited Consolidated Statements of Financial Condition.


The scheduled maturities of our available-for-sale debt securities at March 31, 2018 and December 31, 2017 are presented in the table below:
 
 
Available for Sale
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2018
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
19,963

 
19,389

After five years but within ten years
 
180,927

 
173,171

After ten years
 
732,788

 
715,258

 
 
$
933,678

 
$
907,818

December 31, 2017
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
20,051

 
19,825

After five years but within ten years
 
179,812

 
175,583

After ten years
 
647,928

 
642,091

 
 
$
847,791

 
$
837,499



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Table of Contents

The scheduled maturities of our held-to-maturity debt securities at March 31, 2018 and December 31, 2017 are presented in the table below:
 
 
Held to Maturity
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2018
 
 
 
 
Within one year
 
$
160

 
$
160

After one year but within five years
 
6,867

 
6,850

After five years but within ten years
 
20,042

 
19,930

After ten years
 
132,603

 
132,224

 
 
$
159,672

 
$
159,164

December 31, 2017
 
 
 
 
Within one year
 
$
322

 
$
320

After one year but within five years
 
5,895

 
5,894

After five years but within ten years
 
18,751

 
18,873

After ten years
 
136,218

 
137,766

 
 
$
161,186

 
$
162,853

Mortgage-backed securities (MBS) may have expected maturities that differ from their contractual maturities. These differences arise because issuers may have the right to call securities and borrowers may have the right to prepay obligations with or without prepayment penalty.
Investment securities with fair market values aggregating $619.0 million and $688.2 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2018 and December 31, 2017, respectively.
During the three months ended March 31, 2018, we sold $7.0 million of debt securities categorized as available for sale, resulting in realized gains of less than $0.1 million and no realized losses. During the three months ended March 31, 2017, we sold $263.0 million of debt securities categorized as available for sale, resulting in realized gains of $0.3 million and one security with an immaterial realized loss. The cost basis of all debt securities sales is based on the specific identification method.
As of March 31, 2018 and December 31, 2017, our debt securities portfolio had remaining unamortized premiums of $13.9 million and $14.1 million, respectively, and unaccreted discounts of $1.3 million as of both March 31, 2018 and December 31, 2017.

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Table of Contents

For debt securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual debt securities were in a continuous unrealized loss position at March 31, 2018.
 
 
 
Duration of Unrealized Loss Position
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
CMO
 
$
186,243

 
$
4,292

 
$
77,903

 
$
3,556

 
$
264,146

 
$
7,848

FNMA MBS
 
339,535

 
7,581

 
122,243

 
7,166

 
461,778

 
14,747

FHLMC MBS
 
76,822

 
1,463

 
20,401

 
1,101

 
97,223

 
2,564

GNMA MBS
 
10,537

 
265

 
14,127

 
664

 
24,664

 
929

Total temporarily impaired investments
 
$
613,137

 
$
13,601

 
$
234,674

 
$
12,487

 
$
847,811

 
$
26,088

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
92,114

 
$
708

 
$
5,372

 
$
110

 
$
97,486

 
$
818

Total temporarily impaired investments
 
$
92,114

 
$
708

 
$
5,372

 
$
110

 
$
97,486

 
$
818

 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
$

 
$

 
$
617

 
$
30

 
$
617

 
$
30

For investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2017.
 
 
 
Duration of Unrealized Loss Position
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
CMO
 
$
146,726

 
$
1,820

 
$
77,149

 
$
2,321

 
$
223,875

 
$
4,141

FNMA MBS
 
204,921

 
1,479

 
126,342

 
4,693

 
331,263

 
6,172

FHLMC MBS
 
42,514

 
269

 
21,405

 
655

 
63,919

 
924

GNMA MBS
 
4,615

 
56

 
14,782

 
355

 
19,397

 
411

Total temporarily impaired investments
 
$
398,776

 
$
3,624

 
$
239,678

 
$
8,024

 
$
638,454

 
$
11,648

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
23,404

 
$
59

 
$
5,625

 
$
32

 
$
29,029

 
$
91

Total temporarily impaired investments
 
$
23,404

 
$
59

 
$
5,625

 
$
32

 
$
29,029

 
$
91

 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
$

 
$

 
$
624

 
$
20

 
$
624

 
$
20

At March 31, 2018, we owned debt securities totaling $945.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $26.9 million at March 31, 2018. The temporary impairment is the result of changes in market interest rates subsequent to purchase. Our investment portfolio is reviewed each quarter for indications of OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for full recovery of the unrealized loss. We evaluate our intent and ability to hold debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.
All debt securities, with the exception of one having a fair value of $0.8 million at March 31, 2018, were AA-rated or better at the time of purchase and remained investment grade at March 31, 2018. All securities were evaluated for OTTI at March 31, 2018 and December 31, 2017. The result of this evaluation showed no OTTI as of March 31, 2018 or December 31, 2017. The estimated weighted average duration of MBS was 5.42 years at March 31, 2018.

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5. LOANS
The following table shows our loan portfolio by category:  
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Commercial and industrial
 
$
1,489,563

 
$
1,464,554

Owner-occupied commercial
 
1,080,662

 
1,079,247

Commercial mortgages
 
1,164,424

 
1,187,705

Construction
 
289,943

 
281,608

Residential (1)
 
247,083

 
253,301

Consumer
 
582,722

 
558,493

 
 
4,854,397

 
4,824,908

Less:
 

 
 
Deferred fees, net
 
7,829

 
7,991

Allowance for loan losses
 
40,810

 
40,599

Net loans
 
$
4,805,758

 
$
4,776,318

(1) Includes reverse mortgages, at fair value of $20.0 million at March 31, 2018 and $19.8 million at December 31, 2017.
The following table shows the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the Company applies ASC 310-30 as of the dates indicated:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Outstanding principal balance
 
$
24,838

 
$
27,034

Carrying amount
 
19,828

 
21,295

Allowance for loan losses
 
326

 
358


The following table presents the changes in accretable yield on the acquired credit impaired loans for the three months ended March 31, 2018:
(Dollars in thousands)
 
Three months ended March 31, 2018
Balance at beginning of period
 
$
3,035

Accretion
 
(417
)
Reclassification from nonaccretable difference
 
2

Additions/adjustments
 
(180
)
Disposals
 

Balance at end of period
 
$
2,440


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Table of Contents

6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION
Allowance for Loan Losses
We maintain an allowance for loan losses which represents our best estimate of probable losses in our loan portfolio. As losses are realized, they are charged to this allowance. We established our allowance in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102), Selected Loan Loss Allowance Methodology and Documentation Issues, ASC 450, Contingencies and ASC 310, Receivables. When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation of the allowance is assigned in accordance with ASC 310-10. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based on a continuing review of these portfolios. The following are included in our allowance for loan losses:
 
Specific reserves for impaired loans
An allowance for each pool of homogenous loans based on historical loss experience
Adjustments for qualitative and environmental factors allocated to pools of homogenous loans
When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the three months ended March 31, 2018 and 2017, net charge-offs totaled $3.4 million, or 0.29%, of average loans annualized, and $2.1 million, or 0.19%, of average loans annualized, respectively.
Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled as follows: commercial, owner-occupied commercial, commercial mortgages and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. The probability of default is calculated based on the historical rate of migration to impaired status during the last 29 quarters. During the three months ended March 31, 2018, we increased the look-back period to 29 quarters from the 28 quarters used at December 31, 2017. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the core reserves calculated by the ALLL model are adequately considering the losses within a full credit cycle.
Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 29 quarter look-back period.
Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration:
 
Current underwriting policies, staff, and portfolio mix,
Internal trends of delinquency, nonaccrual and criticized loans by segment,
Risk rating accuracy, control and regulatory assessments/environment,
General economic conditions - locally and nationally,
Market trends impacting collateral values, and
The competitive environment, as it could impact loan structure and underwriting.
The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from core reserves.
The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be approximately nine quarters as of March 31, 2018. Our residential mortgage and consumer LEP remained at four quarters as of March 31, 2018. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP annually for our commercial portfolio and review the current four quarter LEP for the retail portfolio to determine the continued reasonableness of this assumption.

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Table of Contents

Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.
The following tables provide the activity of our allowance for loan losses and loan balances for the three months ended March 31, 2018:
(Dollars in thousands)
 
Commercial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,732

 
$
5,422

 
$
5,891

 
$
2,861

 
$
1,798

 
$
7,895

 
$
40,599

Charge-offs
 
(3,360
)
 
(10
)
 
(48
)
 

 

 
(462
)
 
(3,880
)
Recoveries
 
80

 
5

 
134

 
1

 
14

 
207

 
441

Provision (credit)
 
2,650

 
(58
)
 
617

 
27

 
(129
)
 
548

 
3,655

Provision for acquired loans
 

 

 
23

 
(25
)
 
(3
)
 

 
(5
)
Ending balance
 
$
16,102

 
$
5,359

 
$
6,617

 
$
2,864

 
$
1,680

 
$
8,188

 
$
40,810

 
Loans individually evaluated for impairment
 
$
2,632

 
$

 
$

 
$

 
$
643

 
$
186

 
$
3,461

Loans collectively evaluated for impairment
 
13,296

 
5,347

 
6,528

 
2,857

 
1,001

 
7,994

 
37,023

Acquired loans evaluated for impairment
 
174

 
12

 
89

 
7

 
35

 
9

 
326

Ending balance
 
$
16,102

 
$
5,359

 
$
6,617

 
$
2,864

 
$
1,679

 
$
8,189

 
$
40,810

 
Loans individually evaluated for impairment (2)
 
$
16,993

 
$
4,342

 
$
5,946

 
$
6,490

 
$
12,861

 
$
7,677

 
$
54,309

Loans collectively evaluated for impairment
 
1,361,517

 
938,166

 
970,750

 
267,293

 
145,753

 
541,644

 
4,225,123

Acquired nonimpaired loans
 
107,183

 
133,007

 
178,518

 
15,259

 
67,722

 
33,152

 
534,841

Acquired impaired loans
 
3,870

 
5,147

 
9,210

 
901

 
777

 
249

 
20,154

Ending balance (3)
 
$
1,489,563

 
$
1,080,662

 
$
1,164,424

 
$
289,943

 
$
227,113

 
$
582,722

 
$
4,834,427

(1) 
Period-end loan balance excludes reverse mortgages, at fair value of $20.0 million.
(2) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $20.2 million for the period ending March 31, 2018. Accruing troubled debt restructured loans are considered impaired loans.
(3) 
Ending loan balances do not include net deferred fees.




23

Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three months ended March 31, 2017:
(Dollars in thousands)
 
Commercial
 
Owner -
occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
13,339

 
$
6,588

 
$
8,915

 
$
2,838

 
$
2,059

 
$
6,012

 
$
39,751

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

 
75

 
46

 
2

 
120

 
305

 
632

Provision (credit)
 
1,949

 
(441
)
 
(518
)
 
158

 
(114
)
 
1,080

 
2,114

Provision for acquired loans
 
88

 

 
(4
)
 
(23
)
 

 
(13
)
 
48

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$
6,241

 
$
39,826

 
Loans individually evaluated for impairment
 
$
1,860

 
$

 
$
1,395

 
$
500

 
$
887

 
$
194

 
$
4,836

Loans collectively evaluated for impairment
 
12,165

 
6,015

 
6,763

 
2,397

 
1,144

 
6,042

 
34,526

Acquired loans evaluated for impairment
 
180

 
15

 
177

 
64

 
23

 
5

 
464

Ending balance
 
$
14,205

 
$
6,030

 
$
8,335

 
$
2,961

 
$
2,054

 
$