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, 2019
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 every Interactive Data File required to be submitted 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 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
 
 
  
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
WSFS
 
Nasdaq Global Select Market
Number of shares outstanding of the issuer's common stock, as of the latest practicable date: 53,407,015 shares as of May 3, 2019.
 



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.

2

Table of Contents

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 (the Dodd-Frank Act), the Economic Growth, Regulatory Relief and Consumer Protection Act (which amended the Dodd-Frank Act) (the Economic Growth Act) and the rules and regulations issued in accordance therewith 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;
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, 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;
adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings;
system failures or cybersecurity incidents or other breaches of the Company’s network security;
the Company’s ability to recruit and retain key employees;
the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally;
the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks;
possible changes in the speed of loan prepayments by the Company’s customers and loan origination or sales volumes;

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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;
the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and
the costs associated with resolving any problem loans, litigation and the effects of other risks and uncertainties, including those discussed in the Company’s Form 10-K for the year ended December 31, 2018 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,
 
 
2019
 
2018
(Dollars in thousands, except per share data)
 
(Unaudited)
Interest income:
 
 
 
 
Interest and fees on loans and leases
 
$
87,117

 
$
60,465

Interest on mortgage-backed securities
 
10,466

 
5,399

Interest and dividends on investment securities:
 
 
 
 
Taxable
 
19

 
17

Tax-exempt
 
1,025

 
1,103

Other interest income
 
950

 
629

 
 
99,577

 
67,613

Interest expense:
 
 
 
 
Interest on deposits
 
10,942

 
5,240

Interest on Federal Home Loan Bank advances
 
2,590

 
2,463

Interest on senior debt
 
1,179

 
1,179

Interest on federal funds purchased
 
787

 
446

Interest on trust preferred borrowings
 
726

 
557

Interest on other borrowings
 
39

 
14

 
 
16,263

 
9,899

Net interest income
 
83,314

 
57,714

Provision for loan losses
 
7,654

 
3,650

Net interest income after provision for loan losses
 
75,660

 
54,064

Noninterest income:
 
 
 
 
Credit/debit card and ATM income
 
11,515

 
9,805

Investment management and fiduciary income
 
10,147

 
9,189

Deposit service charges
 
4,746

 
4,630

Mortgage banking activities, net
 
2,092

 
1,737

Loan fee income
 
885

 
599

Securities gains, net
 
15

 
21

Unrealized gains on equity investments
 
3,798

 
15,346

Bank owned life insurance income
 
217

 
232

Other income
 
7,707

 
5,908

 
 
41,122

 
47,467

Noninterest expense:
 
 
 
 
Salaries, benefits and other compensation
 
36,205

 
29,853

Occupancy expense
 
6,367

 
5,248

Equipment expense
 
3,989

 
3,089

Data processing and operations expenses
 
2,588

 
1,907

Professional fees
 
1,872

 
1,725

Marketing expense
 
1,590

 
758

FDIC expenses
 
620

 
599

Loan workout and OREO expenses
 
108

 
426

Corporate development expense
 
26,627

 

Restructuring expense
 
4,362

 

(Recovery of) provision for fraud loss
 

 
(1,665
)
Other operating expense
 
13,264

 
11,472

 
 
97,592

 
53,412

Income before taxes
 
19,190

 
48,119

Income tax provision
 
6,260

 
10,769

Net income
 
$
12,930

 
$
37,350

Less: Net loss attributable to noncontrolling interest
 
(93
)
 

Net income attributable to WSFS
 
$
13,023

 
$
37,350

Earnings per share:
 
 
 
 
Basic
 
$
0.34

 
$
1.19

Diluted
 
$
0.33

 
$
1.16

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,
 
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
Net income
 
$
12,930

 
$
37,350

Less: Net loss attributable to noncontrolling interest
 
(93
)
 

Net income attributable to WSFS
 
13,023

 
37,350

Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gains (loss) on investment securities available for sale
 
 
 
 
Net unrealized gains (loss) arising during the period, net of tax (benefit) expense of $5,452 and $3,714, respectively
 
17,265

 
(11,827
)
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $4 and $5, respectively
 
(11
)
 
(16
)
 
 
17,254

 
(11,843
)
Net change in securities held to maturity
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $29 and $37, respectively
 
(93
)
 
(119
)
Net change in unfunded pension liability
 
 
 
 
Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of $(8) and ($11), respectively
 
(141
)
 
59

Net change in cash flow hedge
 
 
 
 
Net unrealized gain (loss) arising during the period, net of tax expense (benefit) of $199 and ($240) respectively
 
630

 
(765
)
Total other comprehensive income (loss)
 
17,650

 
(12,668
)
Total comprehensive income
 
$
30,673

 
$
24,682

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, 2019
 
December 31, 2018
(Dollars in thousands, except per share and share data)
 
(Unaudited)
 
 
Assets:
 
 
 
 
Cash and due from banks
 
$
190,611

 
$
134,939

Cash in non-owned ATMs
 
457,046

 
484,648

Interest-bearing deposits in other banks including collateral of $0 at March 31, 2019 and $1,000 at December 31, 2018
 
155

 
1,170

Total cash and cash equivalents
 
647,812

 
620,757

Investment securities, available for sale (amortized cost of $1,519,643 at March 31, 2019 and $1,224,227 at December 31, 2018)
 
1,523,196

 
1,205,079

Investment securities, held to maturity, at cost (fair value $149,732 at March 31, 2019 and $149,431 at December 31, 2018)
 
148,190

 
149,950

Other investments
 
48,450

 
37,233

Loans, held for sale at fair value
 
33,893

 
25,318

Loans and leases, net of allowance of $46,321 at March 31, 2019 and $39,539 at December 31, 2018
 
8,655,604

 
4,863,919

Bank owned life insurance
 
89,449

 
6,687

Stock in Federal Home Loan Bank of Pittsburgh at cost
 
12,429

 
19,259

Other real estate owned
 
2,233

 
2,668

Accrued interest receivable
 
40,441

 
22,001

Premises and equipment
 
106,103

 
44,956

Goodwill
 
475,493

 
166,007

Intangible assets
 
104,770

 
20,016

Other assets
 
296,354

 
65,020

Total assets
 
$
12,184,417

 
$
7,248,870

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
2,191,321

 
$
1,626,252

Interest-bearing
 
7,482,383

 
4,014,179

Total deposits
 
9,673,704

 
5,640,431

Federal funds purchased
 
104,275

 
157,975

Federal Home Loan Bank advances
 
81,240

 
328,465

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
98,442

 
98,388

Other borrowed funds
 
55,400

 
47,949

Accrued interest payable
 
6,331

 
1,900

Other liabilities
 
308,337

 
85,831

Total liabilities
 
10,394,740

 
6,427,950

Stockholders’ Equity:
 
 
 
 
Common stock $0.01 par value, 65,000,000 shares authorized; issued 56,941,493 at March 31, 2019 and 56,926,978 at December 31, 2018
 
569

 
569

Capital in excess of par value
 
1,038,494

 
349,810

Accumulated other comprehensive income (loss)
 
2,256

 
(15,394
)
Retained earnings
 
800,511

 
791,031

Treasury stock at cost, 3,813,984 shares at March 31, 2019 and 25,552,887 shares at December 31, 2018
 
(52,078
)
 
(305,096
)
Total stockholders’ equity of WSFS
 
1,789,752

 
820,920

Noncontrolling interest
 
(75
)
 

Total stockholders' equity
 
1,789,677

 
820,920

Total liabilities and stockholders' equity
 
$
12,184,417

 
$
7,248,870

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 of WSFS
 
Non-controlling Interest
 
Total Stockholders' Equity
Balance, December 31, 2017
 
56,279,527

 
$
563

 
$
336,271

 
$
(8,152
)
 
$
669,557

 
$
(273,894
)
 
$
724,345

 
$

 
$
724,345

Net income
 

 

 

 

 
37,350

 

 
37,350

 

 
37,350

Other comprehensive income
 

 

 

 
(12,668
)
 

 

 
(12,668
)
 

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



 

 

 
(2,826
)
 

 
(2,826
)
 

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

 
1

 
2,612

 

 

 

 
2,613

 

 
2,613

Stock-based compensation expense
 

 

 
946

 

 

 

 
946

 

 
946

Repurchase of common stock, 70,000 shares
 

 

 

 

 

 
(3,481
)
 
(3,481
)
 

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

 
$
564

 
$
339,829

 
$
(20,820
)
 
$
704,081

 
$
(277,375
)
 
$
746,279

 
$

 
$
746,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
56,926,978

 
$
569

 
$
349,810

 
$
(15,394
)
 
$
791,031

 
$
(305,096
)
 
$
820,920

 
$

 
$
820,920

Net income
 

 

 

 

 
13,023

 

 
13,023

 
(93
)
 
12,930

Other comprehensive loss
 

 

 

 
17,650

 

 

 
17,650

 

 
17,650

Cash dividend, $0.11 per share
 

 

 

 

 
(3,451
)
 

 
(3,451
)
 

 
(3,451
)
Issuance of common stock including proceeds from exercise of common stock options
 
14,515

 

 
236

 

 

 

 
236

 

 
236

Re-issuance of treasury stock in connection with Beneficial merger and related items
 

 

 
687,898

 

 
(92
)
 
262,071

 
949,877

 
18

 
949,895

Stock-based compensation expense
 

 

 
550

 

 

 

 
550

 

 
550

Repurchase of common stock (1)
 

 

 

 

 

 
(9,053
)
 
(9,053
)
 

 
(9,053
)
Balance, March 31, 2019
 
56,941,493

 
$
569

 
$
1,038,494

 
$
2,256

 
$
800,511

 
$
(52,078
)
 
$
1,789,752

 
$
(75
)
 
$
1,789,677

(1) 
Repurchase of common stock includes 77,452 shares repurchased in connection with the Company's share buyback program approved by the Board of Directors, and 132,993 shares repurchased to cover taxes due on the consideration transferred in the Beneficial acquisition related to the vesting of unrestricted Beneficial stock awards.


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,
 
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net income
 
$
12,930

 
$
37,350

Less: Net loss attributable to noncontrolling interest
 
(93
)
 

Net income attributable to WSFS
 
$
13,023

 
$
37,350

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
7,654

 
3,650

Depreciation of premises and equipment, net
 
2,847

 
2,083

Amortization of fees and discounts, net
 
7,087

 
3,298

Amortization of intangible assets
 
2,764

 
633

Amortization of right of use lease asset
 
4,343

 

(Decrease) increase in operating lease liability
 
(1,820
)
 

Income from mortgage banking activities, net
 
(2,092
)
 
(1,737
)
Gain on sale of securities, net
 
(15
)
 
(21
)
Loss on sale of other real estate owned and valuation adjustments, net
 
4

 
4

Stock-based compensation expense
 
550

 
946

Unrealized gain on equity investments
 
(3,798
)
 
(15,346
)
Deferred income tax expense
 
6,662

 
2,269

Increase in accrued interest receivable
 
(941
)
 
(564
)
(Increase) decrease in other assets
 
(6,797
)
 
530

Origination of loans held for sale
 
(76,409
)
 
(76,962
)
Proceeds from sales of loans held for sale
 
70,257

 
90,433

Increase in accrued interest payable
 
4,431

 
2,413

(Decrease) increase in other liabilities
 
(3,964
)
 
13,799

(Increase) decrease in value of bank owned life insurance
 
(252
)
 
783

Increase in capitalized interest, net
 
(944
)
 
(1,087
)
Net cash provided by operating activities
 
$
22,590

 
$
62,474

Investing activities:
 
 
 
 
Repayments, maturities and calls of investment securities held to maturity
 
3,750

 
1,035

Sale of investment securities available for sale
 
583,852

 
7,012

Purchases of investment securities available for sale
 
(302,817
)
 
(113,451
)
Repayments of investment securities available for sale
 
37,233

 
19,989

Proceeds of bank-owned life insurance death benefit
 

 
96,429

Net increase in loans
 
(93,437
)
 
(34,046
)
Net cash for business combinations
 
76,318

 

Purchases of stock of Federal Home Loan Bank of Pittsburgh
 
(54,126
)
 
(49,391
)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh
 
84,138

 
51,821

Sales of other real estate owned
 
1,454

 
2,098

Investment in premises and equipment
 
(3,694
)
 
(2,267
)
Sales of premises and equipment
 
71

 

Net cash provided by (used in) investing activities
 
$
332,742

 
$
(20,771
)

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Three Months Ended March 31,
 
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
Financing activities:
 
 
 
 
Net increase (decrease) in demand and saving deposits
 
$
9,706

 
$
(62,086
)
Increase in time deposits
 
63,802

 
13,045

(Decrease) increase in brokered deposits
 
(88,517
)
 
24,094

Receipts from FHLB advances
 
20,554,826

 
41,376,732

Repayments of FHLB advances
 
(20,802,051
)
 
(41,499,571
)
Receipts from federal funds purchased
 
7,085,575

 
8,197,250

Repayments of federal funds purchased
 
(7,139,275
)
 
(8,100,250
)
Dividends paid
 
(3,451
)
 
(2,826
)
Issuance of common stock and exercise of common stock options
 
236

 
2,613

Change in noncontrolling interest
 
(75
)
 

Purchase of treasury stock
 
(9,053
)
 
(3,481
)
Net cash used in financing activities
 
$
(328,277
)
 
$
(54,480
)
Increase (decrease) in cash and cash equivalents
 
27,055

 
(12,777
)
Cash and cash equivalents at beginning of period
 
620,757

 
723,866

Cash and cash equivalents at end of period
 
$
647,812

 
$
711,089

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
     Interest
 
$
6,131

 
$
7,486

     Income taxes
 
3,431

 
2,267

Non-cash information:
 
 
 
 
Loans transferred to other real estate owned
 
413

 
2,166

Loans transferred to portfolio from held-for-sale at fair value
 
344

 
(1,750
)
Fair value of assets acquired, net of cash received
 
5,032,452

 

Fair value of liabilities assumed
 
5,108,770

 

Impact of ASC 842 Adoption:
 
 
 
 
     Right of use asset
 
121,228

 

     Lease liability
 
(132,346
)
 

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, 2019
(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 four wholly owned subsidiaries: Beneficial Equipment Finance Corp., WSFS Investment Group, Inc. (WSFS Wealth Investments), 1832 Holdings, Inc., and Monarch Entity Services, LLC, and one majority-owned subsidiary, NewLane Finance Company.
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. Our core banking business is commercial lending funded primarily by customer-generated deposits. 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 152 offices located in Delaware (49), Pennsylvania (72), New Jersey (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 on Form 10-Q.
Basis of Presentation
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 and lease losses and reserves for lending-related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, income taxes 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, the 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 in the U.S. (GAAP), prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. 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, 2019. 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, 2018 (the 2018 Annual Report on Form 10-K) that was filed with the SEC on February 28, 2019 and is available at www.sec.gov or on our website at www.wsfsbank.com. All significant intercompany transactions were eliminated in consolidation.
Business Combinations

On March 1, 2019, we closed the acquisition of Beneficial Bancorp, Inc. (Beneficial), a community bank headquartered in Philadelphia, Pennsylvania, creating the largest, premier, locally-headquartered bank in the Greater Delaware Valley. Beneficial merged with and into WSFS, with WSFS continuing as the surviving corporation and simultaneously, Beneficial Bank merged with and into WSFS Bank, with WSFS Bank continuing as the surviving bank. We expect this acquisition to build our market share, deepen our presence in the Philadelphia, southeastern Pennsylvania and New Jersey markets, and enhance our customer base. The results of Beneficial's operations are included in our unaudited Consolidated Financial Statements since the date of the acquisition. See Note 3 for further information.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies:
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2018 Annual Report on Form 10-K. Those significant accounting policies remain unchanged at March 31, 2019, except as described below:
Leases

We account for our leases in accordance with ASC 842 - Leases. Most of our leases are recognized on the balance sheet by recording a right-of-use asset and lease liability for each lease. The right-of-use asset represents the right to use the asset under lease for the lease term, and lease liability represents the contractual obligation to make lease payments.
As a lessee, WSFS enters into operating leases for certain bank branches, office space, and office equipment. The right-of-use assets and lease liabilities are initially recognized based on the net present value of the remaining lease payments which include renewal options where management is reasonably certain they will be exercised. The net present value is determined using the incremental collateralized borrowing rate at commencement date. The right-of-use asset is measured at the amount of the lease liability adjusted for any prepaid rent, lease incentives and initial direct costs incurred. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As a lessor, WSFS provides direct financing to our customers through our equipment and small-business leasing business. Direct financing leases are recorded at the aggregate of minimum lease payments net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease. Origination fees and costs are deferred, and the net amount is amortized to interest income over the estimated life of the lease.

RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2019
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 substantially 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 comparative modified retrospective transition approach is required; however, in July 2018, the FASB issued ASU 2018-11, Leases-Targeted Improvements, which provides an optional transition method whereby comparative periods presented in the financial statements in the period of adoption do not need to be restated under Topic 842. The Company adopted this guidance on January 1, 2019 using the transition option in ASU 2018-11 and the results of this adoption are recorded in the Consolidated Statements of Financial Condition. See Note 9 for additional disclosures resulting from our adoption of this standard.
Subsequent to adopting ASU 2016-02, in March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which makes targeted changes to lessor accounting and clarifies interim transition disclosure requirements upon adopting Topic 842. The guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance on March 31, 2019. See Note 9 for additional disclosures resulting from our adoption of this standard.
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. The Company adopted this standard on January 1, 2019, on a modified retrospective basis and the adoption did not have an effect on the Consolidated Financial Statements.

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In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815). The new guidance changes both the designation and measurement guidance for qualifying hedging relationships and simplifies 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. Further, the new guidance provides entities the ability to apply hedge accounting to additional hedging strategies as well as permits a one-time reclassification of eligible to be hedged instruments from held to maturity to available for sale upon adoption. The guidance is effective in annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Adoption using the modified retrospective approach is required for hedging relationships that exist as of the date of adoption; presentation and disclosure requirements are applied prospectively. The Company adopted this standard on January 1, 2019 on a modified retrospective basis for existing hedging relationships and on a prospective basis for presentation and disclosure requirements. The adoption of this standard did not have an effect on the Consolidated Financial Statements. See Note 16 for additional disclosures resulting from our adoption of this standard.
In October 2018, the FASB issued ASU No. 2018-16 Derivatives and Hedging - Inclusion of the Secured Overnight Financial Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Topic 815). The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption. The Company adopted this standard on January 1, 2019 on a prospective basis and the adoption did not have an effect on the Consolidated Financial Statements.
Accounting Guidance Pending Adoption at March 31, 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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief to entities transitioning to CECL. 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 and will adopt this guidance on January 1, 2020. A cross-functional team from Finance, Credit, and IT is leading the implementation efforts to evaluate the impact of this guidance on the Company’s Consolidated Financial Statements, internal systems, accounting policies, processes and related internal controls. Presently, we are in the testing phase of our software solution implementation. We continue to evaluate acceptable methodologies, accounting policies, and reporting requirements under the guidance as well as implementation and transition rules issued by regulators. As necessary, we consult with third-party experts and specialists to assist with our implementation efforts. Our implementation efforts to date suggest that adoption may materially increase the allowance for loan losses and decrease capital levels; however, the extent of these impacts will depend on the composition and asset quality of the portfolio, macroeconomic conditions, and significant estimates and judgments made by management at the time of adoption.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework, which amends ASC 820 - Fair Value Measurement. The ASU modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption is required on either a prospective or retrospective basis, depending on the amendment. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plans-General (Topic 715) which applies to all employers that provide defined benefit pension or other postretirement benefit plans for their employees. The ASU modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements to financial statement users. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the retrospective method is required. The Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.

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In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350). The new guidance provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our preliminary review of this guidance to date suggests that adoption may result in a material amount of implementation costs being deferred; however, the extent of the impact will depend on the cloud computing implementations occurring at the time of adoption.

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3. BUSINESS COMBINATIONS
Beneficial Bancorp, Inc.
On March 1, 2019, we closed the acquisition of Beneficial. In accordance with the terms of the merger agreement, the consideration received by Beneficial stockholders consisted of 0.3013 shares of WSFS common stock and $2.93 in cash for each share of Beneficial common stock. Based on the February 28, 2019 closing share price of $43.28, the value of the stock consideration was $950.0 million and cash consideration was $228.2 million, for total transaction value of $1.2 billion. Results of the combined entity’s operations are included in our Consolidated Financial Statements since the date of the acquisition.
Beneficial conducted its primary business operations through its wholly owned subsidiary, Beneficial Bank, which was merged into WSFS Bank. At closing, Beneficial had 74 branches and offices in southeastern Pennsylvania and southern New Jersey. WSFS acquired Beneficial to expand the scale and efficiency of its operations in the Philadelphia, southeastern Pennsylvania and New Jersey markets, and to create opportunities to generate additional revenue by providing its full suite of banking, mortgage banking, wealth management and insurance services to the legacy Beneficial markets.
The acquisition of Beneficial was accounted for as a business combination using the acquisition method of accounting and, accordingly, the assets acquired, liabilities assumed and consideration transferred were recorded at their estimated fair values as of the acquisition date. The excess of consideration transferred over the fair value of net assets acquired was recorded as goodwill, which is not amortizable nor deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. While the valuation of acquired assets and liabilities is nearly completed, the values of certain assets and liabilities are preliminary in nature, and are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. When the valuation is final, any changes to the preliminary valuation of acquired assets and liabilities could result in adjustments to identified intangibles and goodwill. The fair values of assets acquired and liabilities assumed is expected to be finalized during the measurement period, which ends one year from the closing date.
The following table summarizes the consideration transferred and the fair values of the identifiable assets acquired and liabilities assumed:
(Dollars in thousands)
Fair Value
Consideration Transferred:
 
Common shares issued (21,816,355)
$
949,968

Cash paid to Beneficial stock and option holders
228,239

Value of consideration
1,178,207

Assets acquired:
 
Cash and due from banks
304,557

Investment securities
616,703

Loans and leases, net
3,712,157

Premises and equipment
69,132

Deferred income taxes
19,470

Bank owned life insurance
82,510

Core deposit intangible
85,053

Servicing rights intangible
2,466

Other assets
135,474

Total assets
5,027,522

Liabilities assumed:
 
Deposits
4,055,716

Other liabilities
103,085

Total liabilities
4,158,801

Net assets acquired:
868,721

Goodwill resulting from acquisition of Beneficial
$
309,486



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

Acquired loans are initially recorded at their fair values as of the acquisition date. The fair value is based on a discounted cash flow methodology that uses assumptions as to credit risk, default rates, collateral values, loss severity, along with estimated prepayment rates. Loans that have deteriorated in credit quality since their origination, and for which it is probable that all contractual cash flows will not be received, are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For additional information regarding purchased impaired loans, see Note 7 to the unaudited Consolidated Financial Statements.

The Company acquired Beneficial’s investment portfolio with a fair value of $616.7 million, of which $578.8 million of investment securities were sold subsequent to closing. The proceeds received for the investments sold approximated their fair values as of the acquisition date. The fair value of the retained investment portfolio was determined by taking into account market prices obtained from independent valuation source(s). See Note 15 for additional information.

The Company recorded a deferred income tax asset (DTA) of $19.5 million related to tax attributes of Beneficial along with the effects of fair value adjustments resulting from acquisition accounting for the combination.

WSFS recorded $85.1 million of core deposit intangibles which are being amortized over ten years using a straight-line amortization methodology. The fair value of core deposit intangibles was determined based on modeling assumptions that take into consideration customer attrition, deposit interest rates, and alternative costs of funds.

Certificates of deposit accounts were valued by segregating the portfolio into pools based on remaining maturity and comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The valuation adjustment will be accreted or amortized to interest expense over the remaining maturities of the respective pools.

Direct costs related to the acquisition were expensed as incurred. As a result of the merger, the Company developed a comprehensive integration plan under which we have begun to incur costs, including costs to terminate contracts, consolidate facilities and relocate Associates. Costs related to the acquisition and restructuring are presented in the “Corporate Development” and “Restructuring” expense line items, respectively, on the Consolidated Statements of Income.

During the fourth quarter of 2018, WSFS announced a retail banking office optimization plan that includes the consolidation of 14 Beneficial and 11 WSFS Bank banking offices, which we expect to begin during the third quarter of 2019. Additionally, on February 2, 2019, WSFS and Beneficial entered into an agreement to sell five Beneficial branches in New Jersey to the Bank of Princeton. The sale of the branches is subject to customary closing conditions and is expected to be completed during the second quarter of 2019.




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4. NONINTEREST INCOME
Credit/debit card and ATM income
The following table presents the components of credit/debit card and ATM income:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
 
2018
Bailment fees
$
6,900

 
$
6,093

Interchange fees
4,387

 
3,460

Other card and ATM fees
228

 
252

Total credit/debit card and ATM income
$
11,515

 
$
9,805

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 without a transfer of ownership. 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. These fees are typically indexed to a market interest rate. 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 a 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,
(Dollars in thousands)
2019
 
2018
Trust fees
$
6,567

 
$
5,248

Wealth management and advisory fees
3,580

 
3,941

Total investment management and fiduciary income
$
10,147

 
$
9,189

Investment management and fiduciary income is primarily composed of trust fees and wealth management and advisory fees. Trust fees are based on revenue earned from custody, escrow and trustee services on structured finance transactions; indenture trustee, administrative agent and collateral agent services to institutions and corporations; commercial domicile and independent director services; and investment and trustee services to families and individuals across the U.S. Most fees are flat fees, except for a portion of personal and corporate trustee fees where we earn a percentage on the assets under management. This revenue stream primarily generates fee income through monthly, quarterly and annual billings for services provided.
Wealth management and advisory fees consists of fees from Cypress, West Capital, Powdermill, WSFS Wealth Client Management, WSFS Wealth Investments and WSFS Institutional Services. Wealth management and advisory 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,
(Dollars in thousands)
2019
 
2018
Service fees
$
2,716

 
$
2,580

Return and overdraft fees
1,848

 
1,884

Other deposit service fees
182

 
166

Total deposit service charges
$
4,746

 
$
4,630

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,
(Dollars in thousands)
2019
 
2018
Managed service fees
$
2,943

 
$
2,826

Currency preparation
739

 
725

ATM insurance
627

 
590

Miscellaneous products and services
3,398

 
1,767

Total other income
$
7,707

 
$
5,908

Other income consists of managed service fees, which are primarily courier fees related to cash management, 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. For the three months ended March 31, 2019, "Miscellaneous products and services" included a non-recurring transfer of client accounts to a departing Wealth investment adviser, in accordance with the buy-out provisions of the adviser's contract.
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.

See Note 17 for further information about the disaggregation of noninterest income by segment.

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5. 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)
2019
 
2018
Numerator:
 
 
 
Net income attributable to WSFS
$
13,023

 
$
37,350

Denominator:
 
 
 
Weighted average basic shares
38,874

 
31,426

Dilutive potential common shares
410

 
834

Weighted average fully diluted shares
$
39,284

 
$
32,260

Earnings per share:
 
 
 
Basic
$
0.34

 
$
1.19

Diluted
$
0.33

 
$
1.16

Outstanding common stock equivalents having no dilutive effect
39

 
88


6. 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, 2019
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Available-for-Sale Debt Securities
 
 
 
 
 
 
 
 
CMO
 
$
395,818

 
$
2,807

 
$
3,445

 
$
395,180

FNMA MBS
 
875,017

 
7,490

 
4,734

 
877,773

FHLMC MBS
 
213,248

 
2,431

 
747

 
214,932

GNMA MBS
 
35,560

 
199

 
448

 
35,311

 
 
$
1,519,643

 
$
12,927

 
$
9,374

 
$
1,523,196

Held-to-Maturity Debt Securities(1)
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
146,188

 
$
1,592

 
$
51

 
$
147,729

Foreign bonds
 
$
2,002

 
$
1

 
$

 
$
2,003

 
 
$
148,190

 
$
1,593

 
$
51

 
$
149,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Investments(2)
 
 
 
 
 
 
 
 
Visa Class B shares
 
$
15,716

 
$
23,812

 
$

 
$
39,528

Other equity investments
 
8,922

 

 

 
8,922

 
 
$
24,638

 
$
23,812

 
$

 
$
48,450

(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 $1.0 million at March 31, 2019, 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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December 31, 2018
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
Available-for-Sale Debt Securities
 
 
 
 
 
 
 
 
CMO
 
$
376,867

 
$
1,721

 
$
6,838

 
$
371,750

FNMA MBS
 
655,485

 
1,526

 
12,938

 
644,073

FHLMC MBS
 
155,758

 
558

 
2,394

 
153,922

GNMA MBS
 
36,117

 
97

 
880

 
35,334

 
 
$
1,224,227

 
$
3,902

 
$
23,050

 
$
1,205,079

Held-to-Maturity Debt Securities(1)
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
149,950

 
$
275

 
$
794

 
$
149,431

 
 
 
 
 
 
 
 
 
Equity Investments(2)
 
 
 
 
 
 
 
 
Visa Class B shares
 
$
13,918

 
$
20,015

 
$

 
$
33,933

Other equity investments
 
3,300

 

 

 
3,300

 
 
$
17,218

 
$
20,015

 
$

 
$
37,233

(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 $1.0 million at December 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.

The scheduled maturities of our available-for-sale debt securities at March 31, 2019 and December 31, 2018 are presented in the table below:
 
 
Available for Sale
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2019 (1)
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
19,634

 
19,545

After five years but within ten years
 
165,299

 
162,596

After ten years
 
1,334,710

 
1,341,055

 
 
$
1,519,643

 
$
1,523,196

December 31, 2018 (1)
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
19,714

 
19,423

After five years but within ten years
 
170,118

 
163,731

After ten years
 
1,034,395

 
1,021,925

 
 
$
1,224,227

 
$
1,205,079

(1) 
Actual maturities could differ from contractual maturities.








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The scheduled maturities of our held-to-maturity debt securities at March 31, 2019 and December 31, 2018 are presented in the table below:
 
 
Held to Maturity
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
March 31, 2019 (1)
 
 
 
 
Within one year
 
$
1,135

 
$
1,135

After one year but within five years
 
8,950

 
8,971

After five years but within ten years
 
29,992

 
30,240

After ten years
 
108,113

 
109,386

 
 
$
148,190

 
$
149,732

December 31, 2018 (1)
 
 
 
 
Within one year
 
$
1,018

 
$
1,016

After one year but within five years
 
6,703

 
6,701

After five years but within ten years
 
29,613

 
29,547

After ten years
 
112,616

 
112,167

 
 
$
149,950

 
$
149,431

(1) 
Actual maturities could differ from contractual maturities.
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 $1.0 billion and $914.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of March 31, 2019 and December 31, 2018, respectively.
During the three months ended March 31, 2019, we sold $583.9 million of debt securities categorized as available for sale of which $578.8 million was related to the acquisition of Beneficial (see Note 3 for further information about the acquisition). The remaining $5.1 million, resulted in realized gains of less than $0.1 million and no realized losses. 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. The cost basis of all debt securities sales is based on the specific identification method.
As of March 31, 2019 and December 31, 2018, our debt securities portfolio had remaining unamortized premiums of $14.2 million and $12.7 million, respectively, and unaccreted discounts of $3.3 million and $2.5 million, respectively.

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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, 2019.
 
 
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
 
$
3,896

 
$
21

 
$
196,623

 
$
3,424

 
$
200,519

 
$
3,445

FNMA MBS
 

 

 
330,219

 
4,734

 
330,219

 
4,734

FHLMC MBS
 

 

 
63,285

 
747

 
63,285

 
747

GNMA MBS
 
2,979

 
5

 
17,485

 
443

 
20,464

 
448

Total temporarily impaired investments
 
$
6,875

 
$
26

 
$
607,612

 
$
9,348

 
$
614,487

 
$
9,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
134,732

 
$
9

 
$
14,500

 
$
42

 
$
149,232

 
$
51

Foreign Bonds
 
$
500

 
$

 
$

 
$

 
$
500

 
$

Total temporarily impaired investments
 
$
135,232

 
$
9

 
$
14,500

 
$
42

 
$
149,732

 
$
51

 
 
 
 
 
 
 
 
 
 
 
 
 
For debt 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 debt securities were in a continuous unrealized loss position at December 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
 
$
17,143

 
$
40

 
$
212,208

 
$
6,798

 
$
229,351

 
$
6,838

FNMA MBS
 
34,214

 
162

 
407,638

 
12,776

 
441,852

 
12,938

FHLMC MBS
 
16,025

 
21

 
76,469

 
2,373

 
92,494

 
2,394

GNMA MBS
 
5,837

 
79

 
21,805

 
801

 
27,642

 
880

Total temporarily impaired investments
 
$
73,219

 
$
302

 
$
718,120

 
$
22,748

 
$
791,339

 
$
23,050

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
91,228

 
$
155

 
$
58,203

 
$
639

 
$
149,431

 
$
794

At March 31, 2019, we owned debt securities totaling $764.2 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $9.4 million at March 31, 2019. 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 $0.6 million at March 31, 2019, were AA-rated or better at the time of purchase and remained investment grade at March 31, 2019. All securities were evaluated for OTTI at March 31, 2019 and December 31, 2018. The result of this evaluation showed no OTTI as of March 31, 2019 or December 31, 2018. The estimated weighted average duration of MBS was 4.2 years at March 31, 2019.

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7. LOANS
The following table shows our loan and lease portfolio by category:  
(Dollars in thousands)
 
March 31, 2019
 
December 31, 2018
Commercial and industrial
 
$
2,075,430

 
$
1,472,489

Owner-occupied commercial
 
1,312,945

 
1,059,974

Commercial mortgages
 
2,353,152

 
1,162,739

Construction
 
575,697

 
316,566

Commercial small business leases
 
144,658

 

Residential(1)
 
1,115,550

 
218,099

Consumer
 
1,131,759

 
680,939

 
 
8,709,191

 
4,910,806

Less:
 

 
 
Deferred fees, net
 
7,266

 
7,348

Allowance for loan and lease losses
 
46,321

 
39,539

Net loans and leases
 
$
8,655,604

 
$
4,863,919

(1) Includes reverse mortgages at fair value of $16.2 million at March 31, 2019 and $16.5 million at December 31, 2018.


On March 1, 2019, we closed the acquisition of Beneficial. Upon closing the transaction, we acquired $37.0 million of credit impaired loans. The following table details the loans acquired from Beneficial that are accounted for in accordance with ASC 310-30, as of the date of the acquisition.
(Dollars in thousands)
 
March 1, 2019
Contractual required principal and interest at acquisition
 
$
53,647

Contractual cash flows not expected to be collected (nonaccretable difference)
 
20,118

Expected cash flows at acquisition
 
33,529

Interest component of expected cash flows (accretable yield)
 
3,068

Fair value of acquired loans accounted for under ASC 310-30
 
30,461

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, 2019
 
December 31, 2018
Outstanding principal balance
 
$
56,597

 
$
18,642

Carrying amount
 
42,490

 
14,718

Allowance for loan losses
 
227

 
227

The following table presents the changes in accretable yield on the acquired credit impaired loans for the three months ended March 31, 2019 and 2018.
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2019
 
2018
Balance at beginning of period
 
$
2,463

 
$
3,035

Addition from Beneficial
 
3,068

 

Accretion
 
(412
)
 
(417
)
Reclassification from nonaccretable difference
 

 
2

Additions/adjustments
 
(164
)
 
(180
)
Balance at end of period
 
$
4,955

 
$
2,440


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8. ALLOWANCE FOR LOAN AND LEASE 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 homogeneous loans based on historical loss experience
Adjustments for qualitative and environmental factors allocated to pools of homogeneous 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, as 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, 2019 and 2018, net charge-offs totaled $0.9 million, or 0.06%, of average loans annualized, and $3.4 million, or 0.29%, 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 33 quarters. During the first quarter of 2019, we increased the look-back period to 33 quarters from the 32 quarters used at December 31, 2018. This increase in the look-back period allows us to continue to anchor to the fourth quarter of 2010 to ensure that the quantitative reserves calculated by the allowance for loan loss 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 33 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 quantitative reserve estimates and current directional trends. Qualitative factors in our model can add to or subtract from quantitative 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, 2019. Our residential mortgage and consumer LEP estimate remains at four quarters as of March 31, 2019. 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, 2019:
(Dollars in thousands)
 
Commercial and Industrial(1)
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(2)
 
Consumer
 
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
14,211

 
$
5,057

 
$
6,806

 
$
3,712

 
$
1,428

 
$
8,325

 
$
39,539

Charge-offs
 
(742
)
 

 
(2
)
 

 
(122
)
 
(684
)
 
(1,550
)
Recoveries
 
358

 
3

 
29

 
1

 
(14
)
 
301

 
678

Provision (credit)
 
7,123

 
(111
)
 
(156
)
 
331

 
51

 
257

 
7,495

Provision (credit) for acquired loans
 
66

 

 
2

 

 
58

 
33

 
159

Ending balance
 
$
21,016

 
$
4,949

 
$
6,679

 
$
4,044

 
$
1,401

 
$
8,232

 
$
46,321

Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
4,588

 
$

 
$

 
$
367

 
$
533

 
$
166

 
$
5,654