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WSFS FINANCIAL CORP - Quarter Report: 2019 June (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
 

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
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

Number of shares outstanding of the issuer's common stock, as of the latest practicable date: 52,988,084 shares as of August 2, 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.

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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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in thousands, except per share data)
 
(Unaudited)
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans and leases
 
$
129,001

 
$
64,442

 
$
216,118

 
$
124,907

Interest on mortgage-backed securities
 
12,229

 
6,190

 
22,695

 
11,589

Interest and dividends on investment securities:
 
 
 
 
 
 
 
 
Taxable
 
31

 
16

 
50

 
33

Tax-exempt
 
999

 
1,092

 
2,024

 
2,195

Other interest income
 
643

 
411

 
1,593

 
1,040

 
 
142,903

 
72,151

 
242,480

 
139,764

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits
 
16,123

 
6,368

 
27,065

 
11,608

Interest on Federal Home Loan Bank advances
 
806

 
2,536

 
3,396

 
4,999

Interest on senior debt
 
1,180

 
1,180

 
2,359

 
2,359

Interest on federal funds purchased
 
805

 
434

 
1,592

 
880

Interest on trust preferred borrowings
 
717

 
637

 
1,443

 
1,194

Interest on other borrowings
 
40

 
7

 
79

 
21

 
 
19,671

 
11,162

 
35,934

 
21,061

Net interest income
 
123,232

 
60,989

 
206,546

 
118,703

Provision for loan losses
 
12,195

 
2,498

 
19,849

 
6,148

Net interest income after provision for loan losses
 
111,037

 
58,491

 
186,697

 
112,555

Noninterest income:
 
 
 
 
 
 
 
 
Credit/debit card and ATM income
 
13,677

 
10,709

 
25,192

 
20,514

Investment management and fiduciary income
 
10,382

 
10,244

 
20,529

 
19,433

Deposit service charges
 
6,103

 
4,664

 
10,849

 
9,294

Mortgage banking activities, net
 
2,846

 
1,692

 
4,938

 
3,429

Loan fee income
 
650

 
567

 
1,535

 
1,166

Securities gains, net
 
63

 

 
78

 
21

Unrealized gains on equity investments
 
1,033

 

 
4,831

 
15,346

Bank owned life insurance income
 
383

 

 
600

 
232

Other income
 
7,734

 
7,111

 
15,441

 
13,019

 
 
42,871

 
34,987

 
83,993

 
82,454

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries, benefits and other compensation
 
48,550

 
30,944

 
84,755

 
60,797

Occupancy expense
 
8,810

 
5,008

 
15,177

 
10,256

Equipment expense
 
5,444

 
3,176

 
9,433

 
6,265

Data processing and operations expenses
 
3,731

 
1,896

 
6,319

 
3,803

Professional fees
 
2,915

 
2,320

 
4,787

 
4,045

Marketing expense
 
1,947

 
1,084

 
3,537

 
1,842

FDIC expenses
 
1,042

 
515

 
1,662

 
1,114

Loan workout and OREO expenses
 
1,145

 
681

 
1,253

 
1,107

Corporate development expense
 
13,946

 
457

 
40,573

 
457

Restructuring expense
 
1,881

 

 
6,243

 

Recovery of fraud loss
 

 

 

 
(1,665
)
Other operating expense
 
18,437

 
11,750

 
31,701

 
23,222

 
 
107,848

 
57,831

 
205,440

 
111,243

Income before taxes
 
46,060

 
35,647

 
65,250

 
83,766

Income tax provision
 
10,091

 
6,907

 
16,351

 
17,676

Net income
 
$
35,969

 
$
28,740

 
$
48,899

 
$
66,090

Less: Net loss attributable to noncontrolling interest
 
(231
)
 

 
(324
)
 

Net income attributable to WSFS
 
$
36,200

 
$
28,740

 
$
49,223

 
$
66,090

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.68

 
$
0.91

 
$
1.07

 
$
2.10

Diluted
 
$
0.68

 
$
0.89

 
$
1.06

 
$
2.05

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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
 
(Unaudited)
Net income
 
$
35,969

 
$
28,740

 
$
48,899

 
$
66,090

Less: Net loss attributable to noncontrolling interest
 
(231
)
 

 
(324
)
 

Net income attributable to WSFS
 
36,200

 
28,740

 
49,223

 
66,090

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 $6,289 and ($1,398), $11,831, and ($5,112), respectively
 
19,591

 
(4,501
)
 
36,856

 
(16,328
)
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $15, $0, $19 and $5, respectively
 
(48
)
 

 
(59
)
 
(16
)
 
 
19,543

 
(4,501
)
 
36,797

 
(16,344
)
Net change in securities held to maturity
 
 
 
 
 
 
 
 
Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax expense of $27, $36, $56, and $73, respectively
 
(84
)
 
(117
)
 
(177
)
 
(236
)
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), ($9), ($17) and $9, respectively
 
(34
)
 
(30
)
 
(175
)
 
29

Net change in cash flow hedge
 
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period, net of tax expense (benefit) of $323, ($76), $525 and ($316) respectively
 
1,007

 
(245
)
 
1,637

 
(1,010
)
Total other comprehensive income (loss)
 
20,432

 
(4,893
)
 
38,082

 
(17,561
)
Total comprehensive income
 
$
56,632

 
$
23,847

 
$
87,305

 
$
48,529

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
 
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands, except per share and share data)
 
(Unaudited)
 
 
Assets:
 
 
 
 
Cash and due from banks
 
$
183,632

 
$
134,939

Cash in non-owned ATMs
 
338,006

 
484,648

Interest-bearing deposits in other banks including collateral of $0 at June 30, 2019 and $1,000 at December 31, 2018
 
187

 
1,170

Total cash and cash equivalents
 
521,825

 
620,757

Investment securities, available for sale (amortized cost of $1,767,602 at June 30, 2019 and $1,224,227 at December 31, 2018)
 
1,796,870

 
1,205,079

Investment securities, held to maturity, at cost (fair value $145,867 at June 30, 2019 and $149,431 at December 31, 2018)
 
143,317

 
149,950

Other investments
 
48,711

 
37,233

Loans, held for sale at fair value
 
51,721

 
25,318

Loans and leases, net of allowance of $45,364 at June 30, 2019 and $39,539 at December 31, 2018
 
8,567,709

 
4,863,919

Bank owned life insurance
 
30,118

 
6,687

Stock in Federal Home Loan Bank of Pittsburgh at cost
 
15,874

 
19,259

Other real estate owned
 
3,703

 
2,668

Accrued interest receivable
 
40,784

 
22,001

Premises and equipment
 
103,787

 
44,956

Goodwill
 
473,712

 
166,007

Intangible assets
 
101,984

 
20,016

Other assets
 
256,480

 
65,020

Total assets
 
$
12,156,595

 
$
7,248,870

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
2,205,992

 
$
1,626,252

Interest-bearing
 
7,388,718

 
4,014,179

Total deposits
 
9,594,710

 
5,640,431

Federal funds purchased
 
115,000

 
157,975

Federal Home Loan Bank advances
 
115,675

 
328,465

Trust preferred borrowings
 
67,011

 
67,011

Senior debt
 
98,497

 
98,388

Other borrowed funds
 
18,948

 
47,949

Accrued interest payable
 
7,064

 
1,900

Other liabilities
 
303,302

 
85,831

Total liabilities
 
10,320,207

 
6,427,950

Stockholders’ Equity:
 
 
 
 
Common stock $0.01 par value, 90,000,000 shares authorized; issued 57,239,683 at June 30, 2019 and 56,926,978 at December 31, 2018
 
573

 
569

Capital in excess of par value
 
1,043,065

 
349,810

Accumulated other comprehensive income (loss)
 
22,688

 
(15,394
)
Retained earnings
 
830,397

 
791,031

Treasury stock at cost, 4,007,722 shares at June 30, 2019 and 25,552,887 shares at December 31, 2018
 
(60,112
)
 
(305,096
)
Total stockholders’ equity of WSFS
 
1,836,611

 
820,920

Noncontrolling interest
 
(223
)
 

Total stockholders' equity
 
1,836,388

 
820,920

Total liabilities and stockholders' equity
 
$
12,156,595

 
$
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)
 
 
Six Months Ended June 30, 2019
(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, 2018
 
56,926,978

 
$
569

 
$
349,810

 
$
(15,394
)
 
$
791,031

 
$
(305,096
)
 
$
820,920

 
$

 
$
820,920

Net income (loss)
 

 

 

 

 
49,223

 

 
49,223

 
(324
)
 
48,899

Other comprehensive income
 

 

 

 
38,082

 

 

 
38,082

 

 
38,082

Cash dividend, $0.23 per share
 

 

 

 

 
(9,857
)
 

 
(9,857
)
 

 
(9,857
)
Issuance of common stock including proceeds from exercise of common stock options
 
312,705

 
4

 
4,123

 

 

 

 
4,127

 

 
4,127

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

 

 
687,897

 

 

 
262,071

 
949,968

 
101

 
950,069

Stock-based compensation expense
 

 

 
1,235

 

 

 

 
1,235

 

 
1,235

Repurchases of common shares (1)
 

 

 

 

 

 
(17,087
)
 
(17,087
)
 

 
(17,087
)
Balance, June 30, 2019
 
57,239,683

 
$
573

 
$
1,043,065

 
$
22,688

 
$
830,397

 
$
(60,112
)
 
$
1,836,611

 
$
(223
)
 
$
1,836,388

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
(Dollars in thousands, except per share and share amounts)
 
Shares
 
Common Stock
 
Capital in Excess of Par Value
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Treasury Stock
 
Total Stockholders' Equity of WSFS
 
Non-controlling Interest
 
Total Stockholders' Equity
Balance, March 31, 2019
 
56,941,493

 
$
569

 
$
1,038,494

 
$
2,256

 
$
800,511

 
$
(52,078
)
 
$
1,789,752

 
$
(75
)
 
$
1,789,677

Net income (loss)
 

 

 

 

 
36,200

 

 
36,200

 
(231
)
 
35,969

Other comprehensive income
 

 

 

 
20,432

 

 

 
20,432

 

 
20,432

Cash dividend, $0.12 per share
 

 

 

 

 
(6,406
)
 

 
(6,406
)
 

 
(6,406
)
Issuance of common stock including proceeds from exercise of common stock options
 
298,190

 
4

 
3,886

 

 

 

 
3,890

 

 
3,890

BNCL merger and related items
 

 

 

 

 
92

 

 
92

 
83

 
175

Stock-based compensation expense
 

 

 
685

 

 

 

 
685

 

 
685

Repurchases of common shares (2)
 

 

 

 

 

 
(8,034
)
 
(8,034
)
 

 
(8,034
)
Balance, June 30, 2019
 
57,239,683

 
$
573

 
$
1,043,065

 
$
22,688

 
$
830,397

 
$
(60,112
)
 
$
1,836,611

 
$
(223
)
 
$
1,836,388

(1) 
Repurchase of common stock includes 271,340 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.
(2) 
Repurchase of common stock includes 193,888 shares repurchased in connection with the Company's share buyback program approved by the Board of Directors.


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Table of Contents

 
 
Six Months Ended June 30, 2018
(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
 

 

 

 

 
66,090

 

 
66,090

 

 
66,090

Other comprehensive loss
 

 

 

 
(17,581
)
 

 

 
(17,581
)
 

 
(17,581
)
Cash dividend, $0.20 per share
 

 

 

 

 
(6,298
)
 

 
(6,298
)
 

 
(6,298
)
Reclassification due to the adoption of ASU No. 2016-01
 

 

 

 
20

 
(20
)
 

 

 

 

Issuance of common stock including proceeds from exercise of common stock options
 
405,857

 
3

 
7,059

 

 

 

 
7,062

 

 
7,062

Stock-based compensation expense
 

 

 
1,420

 

 

 

 
1,420

 

 
1,420

Repurchases of common shares, 120,000 shares
 

 

 

 

 

 
(6,061
)
 
(6,061
)
 

 
(6,061
)
Balance, June 30, 2018
 
56,685,384

 
$
566

 
$
344,750

 
$
(25,713
)
 
$
729,329

 
$
(279,955
)
 
$
768,977

 
$

 
$
768,977

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
(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, March 31, 2018
 
56,394,559

 
$
564

 
$
339,829

 
$
(20,820
)
 
$
704,081

 
$
(277,375
)
 
$
746,279

 
$

 
$
746,279

Net income
 

 

 

 

 
28,740

 

 
28,740

 

 
28,740

Other comprehensive loss
 

 

 

 
(4,913
)
 

 

 
(4,913
)
 

 
(4,913
)
Cash dividend, $0.11 per share
 

 

 

 

 
(3,472
)
 

 
(3,472
)
 

 
(3,472
)
Reclassification due to the adoption of ASU No. 2016-01
 

 

 

 
20

 
(20
)
 

 

 

 

Issuance of common stock including proceeds from exercise of common stock options
 
290,825

 
2

 
4,447

 

 

 

 
4,449

 

 
4,449

Stock-based compensation expense
 

 

 
474

 

 

 

 
474

 

 
474

Repurchases of common shares, 50,000 shares
 

 

 

 

 

 
(2,580
)
 
(2,580
)
 

 
(2,580
)
Balance, June 30, 2018
 
56,685,384

 
$
566

 
$
344,750

 
$
(25,713
)
 
$
729,329

 
$
(279,955
)
 
$
768,977

 
$

 
$
768,977


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
 
 
 
Six Months Ended June 30,
 
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
Operating activities:
 
 
 
 
Net income
 
$
48,899

 
$
66,090

Less: Net loss attributable to noncontrolling interest
 
(324
)
 

Net income attributable to WSFS
 
$
49,223

 
$
66,090

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
19,849

 
6,148

Depreciation of premises and equipment, net
 
7,203

 
4,189

Amortization of fees and discounts, net
 
24,079

 
7,914

Amortization of intangible assets
 
5,658

 
1,482

Amortization of right of use lease asset
 
12,982

 

Decrease in operating lease liability
 
(4,405
)
 

Income from mortgage banking activities, net
 
(4,938
)
 
(3,429
)
Gain on sale of securities, net
 
(78
)
 
(21
)
Loss on sale of other real estate owned and valuation adjustments, net
 
63

 
70

Stock-based compensation expense
 
1,235

 
1,420

Unrealized gain on equity investments
 
(4,831
)
 
(15,346
)
Deferred income tax expense
 
1,205

 
2,132

Increase in accrued interest receivable
 
(1,284
)
 
(988
)
Decrease in other assets
 
23,060

 
1,827

Origination of loans held for sale
 
(190,508
)
 
(178,182
)
Proceeds from sales of loans held for sale
 
154,508

 
177,997

Increase in accrued interest payable
 
5,164

 
3,094

Decrease in other liabilities
 
(3,512
)
 
(13,526
)
(Increase) decrease in value of bank owned life insurance
 
(632
)
 
779

Increase in capitalized interest, net
 
(1,808
)
 
(1,815
)
Net cash provided by operating activities
 
$
92,233

 
$
59,835

Investing activities:
 
 
 
 
Repayments, maturities and calls of investment securities held to maturity
 
8,235

 
3,780

Sale of investment securities available for sale
 
602,432

 
7,012

Purchases of investment securities available for sale
 
(619,652
)
 
(206,667
)
Repayments of investment securities available for sale
 
90,009

 
50,233

Proceeds from bank-owned life insurance surrender
 
59,711

 
96,429

Net increase in loans
 
(20,646
)
 
(101,978
)
Net cash from business combinations
 
76,072

 

Purchases of stock of Federal Home Loan Bank of Pittsburgh
 
(95,750
)
 
(92,211
)
Redemptions of stock of Federal Home Loan Bank of Pittsburgh
 
122,317

 
93,690

Sales of other real estate owned
 
1,610

 
1,121

Investment in premises and equipment
 
(5,510
)
 
(3,792
)
Sales of premises and equipment
 
71

 
157

Net cash provided by (used in) investing activities
 
$
218,899

 
$
(152,226
)

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Table of Contents

 
 
Six Months Ended June 30,
 
 
2019
 
2018
(Dollars in thousands)
 
(Unaudited)
Financing activities:
 
 
 
 
Net decrease in demand and saving deposits
 
$
(75,871
)
 
$
(45,121
)
Increase in time deposits
 
25,640

 
61,196

(Decrease) increase in brokered deposits
 
(81,028
)
 
98,890

Receipts from FHLB advances
 
23,341,156

 
68,146,387

Repayments of FHLB advances
 
(23,553,946
)
 
(68,226,050
)
Receipts from federal funds purchased
 
15,056,950

 
13,923,750

Repayments of federal funds purchased
 
(15,099,925
)
 
(13,881,750
)
Dividends paid
 
(9,857
)
 
(6,298
)
Issuance of common stock and exercise of common stock options
 
4,127

 
7,062

Change in noncontrolling interest
 
(223
)
 

Purchase of common stock
 
(17,087
)
 
(6,061
)
Net cash (used in) provided by financing activities
 
$
(410,064
)
 
$
72,005

Decrease in cash and cash equivalents
 
(98,932
)
 
(20,386
)
Cash and cash equivalents at beginning of period
 
620,757

 
723,866

Cash and cash equivalents at end of period
 
$
521,825

 
$
703,480

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
     Interest
 
$
30,771

 
$
17,967

     Income taxes
 
15,987

 
17,594

Non-cash information:
 
 
 
 
Loans transferred to other real estate owned
 
2,098

 
1,296

Loans transferred to portfolio from held-for-sale at fair value
 
14,846

 
1,766

Fair value of assets acquired, net of cash received
 
5,033,367

 

Fair value of liabilities assumed
 
5,109,931

 

Impact of ASC 842 Adoption:
 
 
 
 
     Right of use asset
 
121,288

 

     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 AND SIX MONTHS ENDED JUNE 30, 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 Corporation (BEFC), WSFS Investment Group, Inc. (WSFS Wealth Investments), 1832 Holdings, Inc., and WSFS SPE 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 147 offices located in Pennsylvania (72), Delaware (49), New Jersey (24), 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.
Our leasing business is conducted by NewLane Finance Company (formerly Neumann Finance Company) and BEFC. Newlane Finance Company originates small business leases and provides financing products and services to businesses nationwide targeting various equipment categories including technology, software, office, medical and other areas. BEFC originates small business leases, primarily medical and veterinary equipment. During the second quarter of 2019, WSFS Bank announced its intention to combine the operations of NewLane Finance Company and BEFC later in 2019.
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 acquired Beneficial Bancorp, Inc. (Beneficial), including its subsidiary Beneficial Bank, 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. This acquisition grew our market share, deepened our presence in the Philadelphia, southeastern Pennsylvania and New Jersey markets, and enhanced 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 June 30, 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 the 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
ASU No. 2016-02, Leases (Topic 842): 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.

ASU No. 2019-01, Leases (Topic 842): Codification Improvements: 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.

ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities: 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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ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815): 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 15 for additional disclosures resulting from our adoption of this standard.

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): 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 June 30, 2019

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): 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 the current expected credit losses (CECL) 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. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which provides entities the option to irrevocably elect the fair value option on financial instruments within the scope of both ASC 326-20 and ASC 825-10 upon adoption of ASU 2016-13.

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 Information Technology 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. We have completed the implementation of our software solution and a third-party specialist has completed an independent model review of the solution. We continue to focus on our evaluation of acceptable methodologies, accounting policies, and reporting requirements under the guidance as well as implementation and transition rules issued by regulators. As necessary, we will continue to 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.
ASU No. 2018-13, Fair Value Measurement Disclosure Framework: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework, which amends ASC 820 - Fair Value Measurement. The new guidance 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.

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ASU No. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plans-General (Topic 715): 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 new guidance 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.
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): 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.
ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments: In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The new guidance amends ASU 2016-13 to address topics related to accrued interest receivables, recoveries, disclosures, and certain other clarifications. The new guidance also amends ASU 2017-12 to provide clarification on certain hedge accounting topics and transition requirements amended by ASU 2017-12. Lastly, the new guidance amends ASU 2016-01 to add clarification requiring remeasurement under ASC 820 when using the measurement alternative, among certain other clarifications. The guidance is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. Adoption is required on a prospective, modified-retrospective or retrospective basis, depending on the amendment. The Company will evaluate the amendments to ASU 2016-13 in conjunction with our overall evaluation of ASU 2016-13. For other amendments within this guidance, the Company does not expect the application of this guidance to have a material impact on its Consolidated Financial Statements.


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3. BUSINESS COMBINATIONS
Beneficial Bancorp, Inc.
On March 1, 2019, we acquired Beneficial. Subject to the terms and conditions of the merger agreement, the Beneficial stockholders received 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
304,311

Investment securities
619,880

Loans and leases, net
3,711,246

Premises and equipment
69,873

Deferred income taxes
18,739

Bank owned life insurance
82,510

Core deposit intangible
85,053

Servicing rights intangible
2,466

Other assets
135,895

Total assets
5,029,973

Liabilities assumed:
 
Deposits
4,056,506

Other liabilities
102,965

Total liabilities
4,159,471

Net assets acquired:
870,502

Goodwill resulting from acquisition of Beneficial
$
307,705




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The following table details the change to goodwill recorded subsequent to acquisition:
(Dollars in thousands)
 
Fair Value
Goodwill resulting from the acquisition of Beneficial reported as of March 31, 2019
 
$
309,486

Effects of adjustments to:
 
 
Cash and due from banks
 
246

Investment securities
 
(3,177
)
Loans
 
911

Premises and equipment
 
(741
)
Deferred income taxes
 
731

Other assets
 
(420
)
Deposits
 
790

Other liabilities
 
(121
)
Adjusted goodwill resulting from the acquisition of Beneficial as of June 30, 2019
 
$
307,705



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, and 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 $619.9 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 14 for additional information.

The Company recorded a deferred income tax asset (DTA) of $18.7 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 fourteen Beneficial and eleven WSFS Bank banking offices, which we expect to begin during the third quarter of 2019. Additionally, during the second quarter, WSFS completed the sale of five Beneficial retail banking offices in New Jersey to the Bank of Princeton, a New Jersey-based financial institution, at a deposit premium of 7.37%.



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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 June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Bailment fees
$
6,908

 
$
6,588

 
$
13,807

 
$
12,681

Interchange fees
6,452

 
3,847

 
10,839

 
7,307

Other card and ATM fees
317

 
274

 
546

 
526

Total credit/debit card and ATM income
$
13,677

 
$
10,709

 
$
25,192

 
$
20,514


Credit/debit card and ATM income is composed of bailment fees, interchange fees, and other card and ATM fees. Bailment fees 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 made 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 June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Trust fees
$
6,685

 
$
6,118

 
$
13,250

 
$
11,366

Wealth management and advisory fees
3,697

 
4,126

 
7,279

 
8,067

Total investment management and fiduciary income
$
10,382

 
$
10,244

 
$
20,529

 
$
19,433


Investment management and fiduciary income is 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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Table of Contents

Deposit service charges
The following table presents the components of deposit service charges:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Service fees
$
3,179

 
$
2,634

 
$
5,895

 
$
5,214

Return and overdraft fees
2,696

 
1,893

 
4,544

 
3,777

Other deposit service fees
228

 
137

 
410

 
303

Total deposit service charges
$
6,103

 
$
4,664

 
$
10,849

 
$
9,294


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 June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Managed service fees
$
3,624

 
$
3,105

 
$
6,566

 
$
5,931

Currency preparation
851

 
818

 
1,590

 
1,543

ATM insurance
652

 
605

 
1,280

 
1,195

Miscellaneous products and services
2,607

 
2,583

 
6,005

 
4,350

Total other income
$
7,734

 
$
7,111

 
$
15,441

 
$
13,019


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 six months ended June 30, 2019, "Miscellaneous products and services" included income related to 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 16 for further information about the disaggregation of noninterest income by segment.

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Table of Contents

5. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars and shares in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income attributable to WSFS
$
36,200

 
$
28,740

 
$
49,223

 
$
66,090

Denominator:
 
 
 
 
 
 
 
Weighted average basic shares
53,253

 
31,567

 
46,103

 
31,497

Dilutive potential common shares
263

 
697

 
335

 
729

Weighted average fully diluted shares
$
53,516

 
$
32,264

 
$
46,438

 
$
32,226

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.68

 
$
0.91

 
$
1.07

 
$
2.10

Diluted
$
0.68

 
$
0.89

 
$
1.06

 
$
2.05

Outstanding common stock equivalents having no dilutive effect
1

 
11

 
1

 
23



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.
 
 
June 30, 2019
(Dollars in thousands)
 
Amortized Cost
 
Gross
Unrealized
 Gain
 
Gross
Unrealized
 Loss
 
Fair
Value
Available-for-Sale Debt Securities
 
 
 
 
 
 
 
 
CMO
 
$
367,289

 
$
5,455

 
$
509

 
$
372,235

FNMA MBS
 
1,034,233

 
19,091

 
929

 
1,052,395

FHLMC MBS
 
330,609

 
6,219

 
245

 
336,583

GNMA MBS
 
35,471

 
378

 
192

 
35,657

 
 
$
1,767,602

 
$
31,143

 
$
1,875

 
$
1,796,870

Held-to-Maturity Debt Securities(1)
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
141,315

 
$
2,552

 
$
6

 
$
143,861

Foreign bonds
 
$
2,002

 
$
4

 
$

 
$
2,006

 
 
$
143,317

 
$
2,556

 
$
6

 
$
145,867

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

 
$
24,221

 
$

 
$
39,937

Other equity investments
 
8,149

 
625

 

 
8,774

 
 
$
23,865

 
$
24,846

 
$

 
$
48,711

(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 $0.8 million at June 30, 2019, related to securities transferred, which are offset in Accumulated other comprehensive income, 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, 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 June 30, 2019 and December 31, 2018 are presented in the table below:
 
 
Available for Sale
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
June 30, 2019 (1)
 
 
 
 
Within one year
 
$

 
$

After one year but within five years
 
19,457

 
19,519

After five years but within ten years
 
155,351

 
156,432

After ten years
 
1,592,794

 
1,620,919

 
 
$
1,767,602

 
$
1,796,870

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.








21

Table of Contents

The scheduled maturities of our held-to-maturity debt securities at June 30, 2019 and December 31, 2018 are presented in the table below:
 
 
Held to Maturity
 
 
Amortized
 
Fair
(Dollars in thousands)
 
Cost
 
Value
June 30, 2019 (1)
 
 
 
 
Within one year
 
$
2,626

 
$
2,630

After one year but within five years
 
7,423

 
7,458

After five years but within ten years
 
30,228

 
30,703

After ten years
 
103,040

 
105,076

 
 
$
143,317

 
$
145,867

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 $1.1 billion and $914.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of June 30, 2019 and December 31, 2018, respectively.
During the six months ended June 30, 2019, we sold $602.5 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 $23.7 million resulted in realized gains of less than $0.1 million and no realized losses. During the six months ended June 30, 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 June 30, 2019 and December 31, 2018, our debt securities portfolio had remaining unamortized premiums of $15.5 million and $12.7 million, respectively, and unaccreted discounts of $3.5 million and $2.5 million, respectively.

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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 June 30, 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
 
$

 
$

 
$
59,051

 
$
509

 
$
59,051

 
$
509

FNMA MBS
 
31,377

 
43

 
105,513

 
886

 
136,890

 
929

FHLMC MBS
 
18,188

 
89

 
18,581

 
156

 
36,769

 
245

GNMA MBS
 

 

 
14,452

 
192

 
14,452

 
192

Total temporarily impaired investments
 
$
49,565

 
$
132

 
$
197,597

 
$
1,743

 
$
247,162

 
$
1,875

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

 
$

 
$
4,105

 
$
6

 
$
4,105

 
$
6

Total temporarily impaired investments
 
$

 
$

 
$
4,105

 
$
6

 
$
4,105

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
 
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 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 June 30, 2019, we owned debt securities totaling $251.3 million for which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $1.9 million at June 30, 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 June 30, 2019, were AA-rated or better at the time of purchase and remained investment grade at June 30, 2019. All securities were evaluated for OTTI at June 30, 2019 and December 31, 2018. The result of this evaluation showed no OTTI as of June 30, 2019 or December 31, 2018. The estimated weighted average duration of MBS was 3.3 years at June 30, 2019.

23

Table of Contents

7. LOANS
The following table shows our loan and lease portfolio by category:  
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Commercial and industrial
 
$
2,184,487

 
$
1,472,489

Owner-occupied commercial
 
1,280,894

 
1,059,974

Commercial mortgages
 
2,246,047

 
1,162,739

Construction
 
541,696

 
316,566

Commercial small business leases
 
156,037

 

Residential(1)
 
1,081,734

 
218,099

Consumer
 
1,126,733

 
680,939

 
 
8,617,628

 
4,910,806

Less:
 

 
 
Deferred fees, net
 
4,555

 
7,348

Allowance for loan and lease losses
 
45,364

 
39,539

Net loans and leases
 
$
8,567,709

 
$
4,863,919

(1) Includes reverse mortgages at fair value of $15.9 million at June 30, 2019 and $16.5 million at December 31, 2018.


Upon the closing of the Beneficial acquisition on March 1, 2019, 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)
 
June 30, 2019
 
December 31, 2018
Outstanding principal balance
 
$
48,124

 
$
18,642

Carrying amount
 
33,752

 
14,718

Allowance for loan losses
 
179

 
227


The following table presents the changes in accretable yield on the acquired credit impaired loans for the three and six months ended June 30, 2019 and 2018.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
 
$
4,955

 
$
2,440

 
$
2,463

 
$
3,035

Addition from Beneficial
 

 

 
3,068

 

Accretion
 
(662
)
 
(501
)
 
(1,074
)
 
(918
)
Reclassification from nonaccretable difference
 
207

 
1,076

 
207

 
1,078

Additions/adjustments
 
(445
)
 
(90
)
 
(609
)
 
(270
)
Balance at end of period
 
$
4,055

 
$
2,925

 
$
4,055

 
$
2,925



24

Table of Contents

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 six months ended June 30, 2019 and 2018, net charge-offs totaled $14.0 million, or 0.38%, of average loans annualized, and $5.7 million, or 0.24%, 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 34 quarters. During the six months ended June 30, 2019, we increased the look-back period to 34 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 34 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 June 30, 2019. Our residential mortgage and consumer LEP estimate remains at four quarters as of June 30, 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.

25

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 and six months ended June 30, 2019:
(Dollars in thousands)
 
Commercial and Industrial(1)
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(2)
 
Consumer
 
Total
Three months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
21,016

 
$
4,949

 
$
6,679

 
$
4,044

 
$
1,401

 
$
8,232

 
$
46,321

Charge-offs
 
(13,002
)
 
(8
)
 
(153
)
 
(42
)
 
(163
)
 
(960
)
 
(14,328
)
Recoveries
 
203

 
78

 
398

 
1

 
(2
)
 
498

 
1,176

Provision (credit)
 
13,568

 
(526
)
 
(474
)
 
(1,013
)
 
24

 
72

 
11,651

Provision (credit) for acquired loans
 
219

 
(13
)
 
94

 
(6
)
 
98

 
152

 
544

Ending balance
 
$
22,004

 
$
4,480

 
$
6,544

 
$
2,984

 
$
1,358

 
$
7,994

 
$
45,364

Six months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
14,211

 
$
5,057

 
$
6,806

 
$
3,712

 
$
1,428

 
$
8,325

 
$
39,539

Charge-offs
 
(13,744
)
 
(8
)
 
(155
)
 
(42
)
 
(285
)
 
(1,644
)
 
(15,878
)
Recoveries
 
561

 
81

 
427

 
2

 
(16
)
 
799

 
1,854

Provision (credit)
 
20,691

 
(637
)
 
(630
)
 
(682
)
 
75

 
329

 
19,146

Provision (credit) for acquired loans
 
285

 
(13
)
 
96

 
(6
)
 
156

 
185

 
703

Ending balance
 
$
22,004

 
$
4,480

 
$
6,544

 
$
2,984

 
$
1,358

 
$
7,994

 
$
45,364

Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
4,324

 
$

 
$

 
$

 
$
488

 
$
183

 
$
4,995

Loans collectively evaluated for impairment
 
17,679

 
4,401

 
6,496

 
2,976

 
828

 
7,810

 
40,190

Acquired loans evaluated for impairment
 
1

 
79

 
48

 
8

 
42

 
1

 
179

Ending balance
 
$
22,004

 
$
4,480

 
$
6,544

 
$
2,984

 
$
1,358

 
$
7,994

 
$
45,364

Period-end loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment(3)
 
$
21,171

 
$
8,753

 
$
2,431

 
$

 
$
11,398

 
$
7,383

 
$
51,136

Loans collectively evaluated for impairment
 
1,575,810

 
1,168,864

 
765,268

 
324,307

 
134,235

 
848,396

 
4,816,880

Acquired nonimpaired loans
 
738,579

 
99,326

 
1,464,739

 
216,843

 
912,288

 
267,955

 
3,699,730

Acquired impaired loans
 
4,964

 
3,951

 
13,609

 
546

 
7,863

 
2,999

 
33,932

Ending balance(4)
 
$
2,340,524

 
$
1,280,894

 
$
2,246,047

 
$
541,696

 
$
1,065,784

 
$
1,126,733

 
$
8,601,678

(1) 
Includes commercial small business leases.
(2) 
Period-end loan balance excludes reverse mortgages at fair value of $15.9 million.
(3) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $14.2 million for the period ending June 30, 2019. Accruing troubled debt restructured loans are considered impaired loans.
(4) 
Ending loan balances do not include net deferred fees.





26

Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three and six months ended June 30, 2018:
(Dollars in thousands)
 
Commercial and Industrial
 
Owner -
occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Residential(1)
 
Consumer
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,102

 
$
5,359

 
$
6,617

 
$
2,864

 
$
1,680

 
$
8,188

 
$
40,810

Charge-offs
 
(1,740
)
 
(341
)
 

 

 
(54
)
 
(828
)
 
(2,963
)
Recoveries
 
359

 
7

 
3

 
1

 
75

 
247

 
692

Provision (credit)
 
1,133

 
204

 
337

 
422

 
(182
)
 
537

 
2,451

Provision for acquired loans
 
(12
)
 
55

 
(6
)
 
2

 

 
8

 
47

Ending balance
 
$
15,842

 
$
5,284

 
$
6,951

 
$
3,289

 
$
1,519

 
$
8,152

 
$
41,037

Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,732

 
$
5,422

 
$
5,891

 
$
2,861

 
$
1,798

 
$
7,895

 
$
40,599

Charge-offs
 
(5,100
)
 
(351
)
 
(48
)
 

 
(54
)
 
(1,291
)
 
(6,844
)
Recoveries
 
439

 
12

 
137

 
1

 
91

 
454

 
1,134

Provision (credit)
 
3,783

 
146

 
954

 
450

 
(313
)
 
1,086

 
6,106

Provision for acquired loans
 
(12
)
 
55

 
17

 
(23
)
 
(3
)
 
8

 
42

Ending balance
 
$
15,842

 
$
5,284

 
$
6,951

 
$
3,289

 
$
1,519

 
$
8,152

 
$
41,037

Period-end allowance allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
2,208

 
$

 
$
63

 
$
593

 
$
592

 
$
175

 
$
3,631

Loans collectively evaluated for impairment
 
13,472

 
5,266

 
6,804

 
2,687

 
891

 
7,960

 
37,080

Acquired loans evaluated for impairment
 
162

 
18

 
84

 
9

 
36

 
17

 
326

Ending balance
 
$
15,842

 
$
5,284

 
$
6,951

 
$
3,289

 
$
1,519

 
$
8,152

 
$
41,037

Period-end loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment(2)
 
$
17,015

 
$
3,224

 
$
6,737

 
$
5,557

 
$
12,282

 
$
7,714

 
$
52,529

Loans collectively evaluated for impairment
 
1,404,662

 
952,627

 
972,684

 
283,480

 
134,323

 
581,536

 
4,329,312

Acquired nonimpaired loans
 
101,532

 
125,129

 
172,082

 
7,352

 
65,723

 
29,239

 
501,057

Acquired impaired loans
 
2,904

 
4,915

 
9,151

 
731

 
771

 
251

 
18,723

Ending balance(3)
 
$
1,526,113

 
$
1,085,895

 
$
1,160,654

 
$
297,120

 
$
213,099

 
$
618,740

 
$
4,901,621

 
(1) 
Period-end loan balance excludes reverse mortgages at fair value of $16.1 million.
(2) 
The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $16.3 million for the period ending June 30, 2018. Accruing troubled debt restructured loans are considered impaired loans.
(3) 
Ending loan balances do not include net deferred fees.
Nonaccrual and Past Due Loans
Nonaccruing loans are those on which the accrual of interest has ceased. Typically, we discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the accretion of net deferred loan fees and amortization of net deferred loan costs is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing are defined as loans contractually past due 90 days or more as to principal or interest payments, but which remain in accrual status because they are considered well secured and are in the process of collection.

27

Table of Contents

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

 
 
June 30, 2019
(Dollars in thousands)
 
30–59 Days
Past Due 
and
Still 
Accruing
 
60–89 Days
Past Due and
Still 
Accruing
 
Greater 
Than
90 Days
Past Due and
Still Accruing
 
Total Past
Due
And Still
Accruing
 
Accruing
Current
Balances
 
Acquired
Impaired
Loans
 
Nonaccrual
Loans
 
Total
Loans
Commercial and industrial(1)
 
$
3,894

 
$
682

 
$

 
$
4,576

 
$
2,309,943

 
$
4,964

 
$
21,041

 
$
2,340,524

Owner-occupied commercial
 
4,105

 
398

 
1,165

 
5,668

 
1,262,522

 
3,951

 
8,753

 
1,280,894

Commercial mortgages
 
4,499

 
201

 

 
4,700

 
2,225,436

 
13,609

 
2,302

 
2,246,047

Construction
 
249

 

 

 
249

 
540,901

 
546

 

 
541,696

Residential(2)
 
6,022

 
6

 
115

 
6,143

 
1,047,891

 
7,863

 
3,887

 
1,065,784

Consumer(3)
 
6,693

 
3,811

 
14,387

 
24,891

 
1,097,190

 
2,999

 
1,653

 
1,126,733

Total(4)
 
$
25,462

 
$
5,098

 
$
15,667

 
$
46,227

 
$
8,483,883

 
$
33,932

 
$
37,636

 
$
8,601,678

% of Total Loans
 
0.30
%
 
0.06
%
 
0.18
%
 
0.54
%
 
98.63
%
 
0.39
%
 
0.44
%
 
100
%
(1) 
Includes commercial small business leases.
(2) 
Residential accruing current balances excludes reverse mortgages at fair value of $15.9 million.
(3) 
Includes $22.3 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss.
(4) 
The balances above include a total of $3.7 billion acquired non-impaired loans.
 
 
December 31, 2018
(Dollars in thousands)
 
30–59 Days
Past Due 
and
Still 
Accruing
 
60–89 Days
Past Due 
and
Still 
Accruing
 
Greater 
Than
90 Days
Past Due and
Still Accruing
 
Total Past
Due
And Still
Accruing
 
Accruing
Current
Balances
 
Acquired
Impaired
Loans
 
Nonaccrual
Loans
 
Total
Loans
Commercial and industrial
 
$
3,653

 
$
993

 
$
71

 
$
4,717

 
$
1,452,185

 
$
1,531

 
$
14,056

 
$
1,472,489

Owner-occupied commercial
 
733

 
865

 

 
1,598

 
1,049,722

 
4,248

 
4,406

 
1,059,974

Commercial mortgages
 
1,388

 
908

 

 
2,296

 
1,148,988

 
7,504

 
3,951

 
1,162,739

Construction
 
157

 

 

 
157

 
312,879

 
749

 
2,781

 
316,566

Residential(1)
 
1,970

 
345

 
660

 
2,975

 
194,960

 
761

 
2,854

 
201,550

Consumer
 
525

 
971

 
104

 
1,600

 
677,182

 
151

 
2,006

 
680,939

Total(2)
 
$
8,426

 
$
4,082

 
$
835

 
$
13,343

 
$
4,835,916

 
$
14,944

 
$
30,054

 
$
4,894,257

% of Total Loans
 
0.17
%
 
0.08
%
 
0.02
%
 
0.27
%
 
98.81
%
 
0.31
%
 
0.61
%
 
100
%
(1) 
Residential accruing current balances excludes reverse mortgages, at fair value of $16.5 million.
(2) 
The balances above include a total of $430.0 million acquired non-impaired loans.
Impaired Loans
Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and ASC 310. The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the fair value of collateral, if the loan is collateral dependent or (3) the loan’s observable market price. If the measure of the impaired loan is less than the recorded investment in the loan, a related allowance is allocated for the impairment.

28

Table of Contents

The following tables provide an analysis of our impaired loans at June 30, 2019 and December 31, 2018:
 
 
 
June 30, 2019
(Dollars in thousands)
 
Ending
Loan
Balances
 
Loans with
No Related
Reserve(1)
 
Loans with
Related
Reserve(2)
 
Related Reserve
 
Contractual
Principal Balances(2)
 
Average Loan Balances
Commercial and industrial
 
$
21,173

 
$
8,227

 
$
12,946

 
$
4,324

 
$
25,425

 
$
18,055

Owner-occupied commercial
 
10,134

 
8,753

 
1,381

 
79

 
10,430

 
6,522

Commercial mortgages
 
3,755

 
2,431

 
1,324

 
48

 
8,047

 
6,300

Construction
 
546

 

 
546

 
8

 
638

 
3,285

Residential
 
11,610

 
7,733

 
3,877

 
530

 
13,722

 
11,602

Consumer
 
7,414

 
6,009

 
1,405

 
185

 
8,161

 
7,932

Total
 
$
54,632

 
$
33,153

 
$
21,479

 
$
5,174

 
$
66,423

 
$
53,696

(1) 
Reflects loan balances at or written down to their remaining book balance.
(2) 
The above includes acquired impaired loans totaling $3.5 million in the ending loan balance and $3.8 million in the contractual principal balance.
 
 
December 31, 2018
(Dollars in thousands)
 
Ending
Loan
Balances
 
Loans with
No Related
Reserve
(1)
 
Loans with
Related
Reserve(2)
 
Related
Reserve
 
Contractual
Principal
Balances(2)
 
Average
Loan
Balances
Commercial and industrial
 
$
14,841

 
$
8,625

 
$
6,216

 
$
878

 
$
22,365

 
$
18,484

Owner-occupied commercial
 
6,065

 
4,406

 
1,659

 
92

 
6,337

 
5,378

Commercial mortgages
 
5,679

 
4,083

 
1,596

 
79

 
15,372

 
7,438

Construction
 
3,530

 

 
3,530

 
458

 
5,082

 
5,091

Residential
 
11,321

 
6,442

 
4,879

 
581

 
13,771

 
12,589

Consumer
 
7,916

 
6,899

 
1,017

 
170

 
8,573

 
7,956

Total
 
$
49,352

 
$
30,455

 
$
18,897

 
$
2,258

 
$
71,500

 
$
56,936

(1) 
Reflects loan balances at or written down to their remaining book balance.
(2) 
The above includes acquired impaired loans totaling $4.3 million in the ending loan balance and $4.8 million in the contractual principal balance.
Interest income of $0.4 million and $0.6 million was recognized on impaired loans during the three and six months ended June 30, 2019, respectively. Interest income of $0.4 million and $0.7 million was recognized on impaired loans during the three and six months ended June 30, 2018, respectively.
As of June 30, 2019, there were 19 residential loans and 14 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $2.0 million and $5.2 million, respectively. As of December 31, 2018, there were 26 residential loans and 11 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $1.9 million and $5.3 million, respectively.
Reserves on Acquired Nonimpaired Loans
In accordance with ASC 310, loans acquired by the Bank through its mergers with First National Bank of Wyoming, Alliance Bancorp, Inc. (Alliance), Penn Liberty Bank (Penn Liberty) and Beneficial are reflected on the balance sheet at their fair values on the date of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date, the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance.

29

Table of Contents

Credit Quality Indicators
Below is a description of each of our risk ratings for all commercial loans:
 
Pass. These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible.
Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.
Substandard. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. A distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful. Borrowers have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.
Loss. Loans are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.
Residential and Consumer Loans
The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.


30

Table of Contents

The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the Allowance for Loan Loss.
Commercial Credit Exposure
 
 
June 30, 2019
 
 
Commercial and Industrial(1)
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Total
Commercial(2)
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Amount
 
%
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
Special mention
 
$
4,000

 
$
10,817

 
$
7,352

 
$

 
$
22,169

 
 
Substandard:
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
51,980

 
18,969

 
10,910

 
497

 
82,356

 
 
Nonaccrual
 
16,717

 
8,753

 
2,302

 

 
27,772

 
 
Doubtful
 
4,324

 

 

 

 
4,324

 
 
Total Special Mention and Substandard
 
77,021

 
38,539

 
20,564

 
497

 
136,621

 
2
%
Acquired impaired
 
4,964

 
3,951

 
13,609

 
546

 
23,070

 
%
Pass
 
2,258,539

 
1,238,404

 
2,211,874

 
540,653

 
6,249,470

 
98
%
Total
 
$
2,340,524

 
$
1,280,894

 
$
2,246,047

 
$
541,696

 
$
6,409,161

 
100
%
(1) 
 Includes commercial small business leases.
(2) 
Table includes $2.5 billion of acquired non-impaired loans as of June 30, 2019.

 
 
December 31, 2018
 
 
Commercial
 and Industrial
 
Owner-occupied
Commercial
 
Commercial
Mortgages
 
Construction
 
Total
Commercial(1)
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Amount
 
%
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
Special mention
 
$
8,710

 
$
21,230

 
$

 
$

 
$
29,940

 
 
Substandard:
 
 
 
 
 
 
 
 
 


 
 
Accrual
 
37,424

 
21,081

 
9,767

 
168

 
68,440

 
 
Nonaccrual
 
13,180

 
4,406

 
3,951

 
2,337

 
23,874

 
 
Doubtful
 
876

 

 

 
444

 
1,320

 
 
Total Special Mention and Substandard
 
60,190

 
46,717

 
13,718

 
2,949

 
123,574

 
3
%
Acquired impaired
 
1,531

 
4,248

 
7,504

 
749

 
14,032

 
%
Pass
 
1,410,768

 
1,009,009

 
1,141,517

 
312,868

 
3,874,162

 
97
%
Total
 
$
1,472,489

 
$
1,059,974

 
$
1,162,739

 
$
316,566

 
$
4,011,768

 
100
%
(1) 
Table includes $350.5 million of acquired non-impaired loans as of December 31, 2018.
Residential and Consumer Credit Exposure
 
 
 
Residential(2)
 
Consumer
 
Total Residential and Consumer(3)
 
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
 
Amount
 
Percent
 
Amount
 
Percent
Nonperforming(1)
 
$
12,106

 
$
11,017

 
$
7,378

 
$
7,883

 
$
19,484

 
1
%
 
$
18,900

 
2
%
Acquired impaired loans
 
7,863

 
761

 
2,999

 
151

 
10,862

 
%
 
912

 
%
Performing
 
1,045,815

 
189,772

 
1,116,356

 
672,905

 
2,162,171

 
99
%
 
862,677

 
98
%
Total
 
$
1,065,784

 
$
201,550

 
$
1,126,733

 
$
680,939

 
$
2,192,517

 
100
%
 
$
882,489

 
100
%
(1) 
Includes $13.9 million as of June 30, 2019 and $14.0 million as of December 31, 2018 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest.
(2) 
Residential performing loans excludes $15.9 million and $16.5 million of reverse mortgages at fair value as of June 30, 2019 and December 31, 2018, respectively.
(3) 
Total includes $1.2 billion and $79.5 million in acquired non-impaired loans as of June 30, 2019 and December 31, 2018, respectively.

31

Table of Contents

Troubled Debt Restructurings (TDRs)
TDRs are recorded in accordance with ASC 310-40, Troubled Debt Restructuring by Creditors
The following table presents the balance of TDRs as of the indicated dates:
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Performing TDRs
 
$
14,203

 
$
14,953

Nonperforming TDRs
 
6,966

 
10,211

Total TDRs
 
$
21,169

 
$
25,164


Approximately $0.8 million and $1.2 million in related reserves have been established for these loans at June 30, 2019 and December 31, 2018, respectively.
The following table presents information regarding the types of loan modifications made for the three and six months ended June 30, 2019 and 2018:
 
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
 
 
Contractual payment reduction and term extension
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other(1)
 
Total
 
Contractual payment reduction and term extension
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other(1)
 
Total
Commercial and Industrial
 

 
1

 

 
2

 
3

 

 
1

 

 
2

 
3

Owner-occupied commercial
 

 

 

 
2

 
2

 

 

 

 
2

 
2

Commercial Mortgages
 

 

 

 
1

 
1

 
1

 

 

 
1

 
2

Construction
 

 

 

 

 

 

 

 

 

 

Residential
 
3

 

 

 

 
3

 
4

 

 
1

 

 
5

Consumer
 
3

 
1

 

 

 
4

 
6

 
1

 
1

 

 
8

Total
 
6

 
2

 

 
5

 
13

 
11

 
2

 
2

 
5

 
20


 
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
 
 
Contractual payment reduction and term extension
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other(1)
 
Total
 
Contractual payment reduction and term extension
 
Maturity Date Extension
 
Discharged in bankruptcy
 
Other(1)
 
Total
Commercial and Industrial
 
3

 

 

 

 
3

 
3

 

 

 

 
3

Owner-occupied commercial
 

 

 

 

 

 

 

 

 

 

Commercial Mortgages
 
1

 

 

 

 
1

 
1

 
1

 

 

 
2

Construction
 

 

 

 

 

 

 
1

 

 

 
1

Residential
 
4

 

 

 

 
4

 
4

 

 

 

 
4

Consumer
 
6

 

 
3

 

 
9

 
7

 
1

 
3

 
2

 
13

Total
 
14

 

 
3

 

 
17

 
15

 
3

 
3

 
2

 
23

(1)Other includes underwriting exceptions.
Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, which is typically six months, and repayment is reasonably assured.

32

Table of Contents

The following table presents loans identified as TDRs during the three and six months ended June 30, 2019 and 2018.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in thousands)
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
 
Pre Modification
 
Post Modification
Commercial
 
$
1,347

 
$
1,347

 
$
4,782

 
$
4,782

 
$
1,347

 
$
1,347

 
$
4,782

 
$
4,782

Owner-occupied commercial
 
1,435

 
1,435

 

 

 
1,435

 
1,435

 

 

Commercial mortgages
 
483

 
483

 
1,564

 
1,564

 
514

 
514

 
2,022

 
2,022

Construction
 

 

 

 

 

 

 
920

 
920

Residential
 
321

 
321

 
469

 
469

 
423

 
423

 
469

 
469

Consumer
 
540

 
540

 
861

 
861

 
1,408

 
1,408

 
1,123

 
1,123

Total
 
$
4,126

 
$
4,126

 
$
7,676

 
$
7,676

 
$
5,127

 
$
5,127

 
$
9,316

 
$
9,316


During the three and six months ended June 30, 2019, the TDRs set forth in the table above resulted in a $0.1 million and $0.2 million decrease in our allowance for loan losses, respectively, and no additional charge-offs. For the three and six months ended June 30, 2018, the TDRs set forth in the table resulted in a decrease of $0.7 million in our allowance for loan losses and $0.1 million additional charge-offs.
During the three months ended June 30, 2019, three TDRs defaulted that had received troubled debt modification during the past twelve months with a total loan amount of $1.2 million, compared with two loans with a total loan amount of $0.1 million during the three months ended June 30, 2018. During the six months ended June 30, 2019, four TDRs defaulted that had received troubled debt modification during the past twelve months with a total loan amount of $1.3 million, compared with four TDRs with a total loan amount of $0.2 million during the six months ended June 30, 2018.



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9. LEASES
As a lessee, the Company enters into leases for its bank branches, corporate offices, and certain equipment. As a lessor, the Company primarily provides financing through our equipment leasing business.

Lessee

Our leases have remaining lease terms of less than 1 year to 43 years, which includes renewal options that are exercised at our discretion. The Company's lease terms to calculate the lease liability and right of use asset include options to extend the lease when it is reasonably certain that the Company will exercise the option. The lease liability and right of use asset is included within Other liabilities and Other assets, respectively, in the unaudited Consolidated Statement of Financial Condition. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. Operating lease expense is included within Occupancy expense in the unaudited Consolidated Statement of Income. We account for lease components separately from nonlease components. We sublease certain real estate to third parties.

The components of operating lease cost were as follows:
 
 
Three months ended
 
Six months ended
(Dollars in thousands)
 
June 30, 2019
 
June 30, 2019
Operating lease cost (1) (2)
 
$
11,024

 
$
16,748

Sublease income
 
(175
)
 
(276
)
Net lease cost
 
$
10,849

 
$
16,472

(1) 
Includes variable lease cost and short-term lease cost.
(2) 
Includes accelerated expense due to the previously announced retail branch optimization plan.

Supplemental balance sheet information related to operating leases was as follows:
(Dollars in thousands)
 
June 30, 2019
Assets
 
 
Operating right of use assets
 
$
172,458

Total assets
 
$
172,458

 
 
 
Liabilities
 
 
Operating lease liabilities
 
$
186,186

Total liabilities
 
$
186,186

 
 
 
Lease term and discount rate
 
 
 
 
June 30, 2019
Weighted average remaining lease term (in years)
 
 
Operating leases
 
19.79

Weighted average discount rate
 
 
Operating leases
 
4.27
%



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Maturities of operating lease liabilities under ASC 842, Leases (as adopted on January 1, 2019) were as follows:
(Dollars in thousands)
 
June 30, 2019
2019
 
$
14,479

2020
 
16,948

2021
 
16,605

2022
 
16,557

2023
 
16,717

After 2023
 
212,429

Total lease payments
 
293,735

Less: Interest
 
(107,549
)
Present value of lease liabilities
 
$
186,186



The minimum cash payments for operating leases under ASC 840, Leases were as follows:
(Dollars in thousands)
 
December 31, 2018
2019
 
$
11,562

2020
 
11,411

2021
 
11,132

2022
 
11,078

2023
 
11,141

After 2023
 
169,929

Total minimum lease payments
 
$
226,253



Supplemental cash flow information related to leases was as follows:
 
 
Six months ended
(Dollars in thousands)
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
7,941

Right of use assets obtained in exchange for new operating lease liabilities (non-cash)
 
61,693



Lessor Equipment Leasing

WSFS provides equipment and small business lease financing through our two leasing subsidiaries, BEFC and NewLane Finance Company, acquired from our acquisition of Beneficial on March 1, 2019. Interest income from direct financing leases where the Company is a lessor is recognized in Interest and Fees on Loans and Leases on the Consolidated Statements of Income.

The components of direct finance lease income are summarized in the table below:
 
 
Three months ended
 
Six months ended
(Dollars in thousands)
 
June 30, 2019
 
June 30, 2019
Direct financing leases:
 
 
 
 
Interest income on lease receivable
 
$
3,109

 
$
3,778

Interest income on deferred fees and costs
 
206

 
263

Total direct financing lease income
 
$
3,315

 
$
4,041



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Table of Contents

Equipment leasing receivables relate to direct financing leases. The composition of the net investment in direct financing leases was as follows:
(Dollars in thousands)
 
June 30, 2019
Lease receivables
 
$
176,497

Unearned income
 
(20,321
)
Deferred fees and costs
 
562

Net investment in direct financing leases
 
$
156,738



At June 30, 2019, future minimum lease payments to be received for direct financing leases were as follows:
(Dollars in thousands)
 
Direct financing leases
2019
 
$
31,405

2020
 
54,378

2021
 
41,351

2022
 
27,301

2023
 
16,245

After 2023
 
5,817

Total lease payments
 
$
176,497




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Table of Contents

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

During the six months ended June 30, 2019, we determined there were no events or indicators of impairment as it relates to goodwill or other intangibles.

The following table shows the allocation of goodwill to our reportable operating segments for purposes of goodwill impairment testing:
 
(Dollars in thousands)
WSFS
Bank
 
Cash
Connect
 
Wealth
Management
 
Consolidated
Company
December 31, 2018
$
145,808

 
$

 
$
20,199

 
$
166,007

Goodwill from business combinations
309,486

 

 

 
309,486

Remeasurement adjustments
(1,781
)
 

 

 
(1,781
)
June 30, 2019
$
453,513

 
$

 
$
20,199

 
$
473,712


ASC 350 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.
The following table summarizes our intangible assets:
 
(Dollars in thousands)
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Net
Intangible
Assets
 
Amortization Period
June 30, 2019
 
 
 
 
 
 
 
Core deposits
$
95,711

 
$
(8,603
)
 
$
87,108

 
10 years
Customer relationships
17,561

 
(6,615
)
 
10,946

 
7-15 years
Non-compete agreements
221

 
(124
)
 
97

 
5 years
Loan servicing rights
5,219

 
(1,386
)
 
3,833

 
10-30 years
Total intangible assets
$
118,712

 
$
(16,728
)
 
$
101,984

 
 
December 31, 2018
 
 
 
 
 
 
 
Core deposits
$
10,658

 
$
(5,285
)
 
$
5,373

 
10 years
Customer relationships
17,561

 
(5,815
)
 
11,746

 
7-15 years
Non-compete agreements
221

 
(101
)
 
120

 
5 years
Loan servicing rights
2,652

 
(1,301
)
 
1,351

 
10-30 years
Favorable lease asset (1)
1,932

 
(506
)
 
1,426

 
10 months-18 years
Total intangible assets
$
33,024

 
$
(13,008
)
 
$
20,016

 
 
(1) 
The favorable lease asset was fully amortized and written off during the six months ended June 30, 2019 as a result of our adoption of ASU 2016-02 on January 1, 2019. See Note 2 for further information.
We recognized amortization expense on intangible assets of $2.8 million and $4.1 million for the three and six months ended June 30, 2019, respectively, and $0.7 million and $1.4 million for the three and six months ended June 30, 2018, respectively.

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The following table presents the estimated future amortization expense on our intangible assets:
 
(Dollars in thousands)
Amortization
of Intangibles
Remaining in 2019
$
5,644

2020
11,105

2021
10,780

2022
10,717

2023
10,689

Thereafter
53,049

Total
$
101,984



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Table of Contents

11. DEPOSITS

The following table shows our deposits by category:
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Noninterest-bearing:
 
 
 
 
 
Noninterest demand
 
$
2,205,992

 
$
1,626,252

 
 
Total noninterest-bearing
 
$
2,205,992

 
$
1,626,252

 
 
 
 
 
 
 
Interest-bearing:
 
 
 
 
 
Interest-bearing demand
 
$
2,039,545

 
$
1,062,228

 
Savings
 
1,600,879

 
538,213

 
Money market
 
1,987,485

 
1,542,962

 
Customer time deposits
 
1,437,650

 
672,942

 
Brokered deposits
 
323,159

 
197,834

 
 
Total interest-bearing
 
7,388,718

 
4,014,179

 
 
Total deposits
 
$
9,594,710

 
$
5,640,431




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Table of Contents

12. ASSOCIATE BENEFIT PLANS
Postretirement Medical Benefits
We share certain costs of providing health and life insurance benefits to eligible retired Associates (employees) and their eligible dependents. Previously, all Associates were eligible for these benefits if they reached normal retirement age while working for us. Effective March 31, 2014, we changed the eligibility of this plan to include only those Associates who have achieved ten years of service with us as of March 31, 2014. As of December 31, 2014, we began to use the mortality table issued by the Office of the Actuary of the U.S. Bureau of Census in our calculation.
We account for our obligations under the provisions of ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that we recognize the costs of these benefits over an Associate’s active working career. Amortization of unrecognized net gains or losses resulting from experience different from that assumed and from changes in assumptions is included as a component of net periodic benefit cost over the remaining service period of active employees to the extent that such gains and losses exceed 10% of the accumulated postretirement benefit obligation, as of the beginning of the year. We recognize our net periodic benefit cost in Salaries, benefits and other compensation in our unaudited Consolidated Statements of Income.
The following table presents the components of net periodic benefit cost related to our postretirement medical benefits plan measured at January 1, 2019 and 2018.
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
14

 
$
15

 
$
27

 
$
30

Interest cost
 
19

 
18

 
38

 
35

Prior service cost amortization
 
(19
)
 
(19
)
 
(38
)
 
(38
)
Net gain recognition
 
(16
)
 
(12
)
 
(31
)
 
(23
)
Net periodic benefit cost
 
$
(2
)
 
$
2

 
$
(4
)
 
$
4



Alliance Associate Pension Plan

During the fourth quarter of 2015, we completed the acquisition of Alliance and its wholly owned subsidiary, Alliance Bank, headquartered in Broomall, Pennsylvania. At the time of the acquisition, we assumed the Alliance pension plan offered to its current Associates.
The following table presents the components of net periodic benefit cost related to the Alliance Associate Pension Plan measured at January 1, 2019 and 2018.
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
10

 
$
10

 
$
20

 
$
20

Interest cost
 
69

 
74

 
138

 
147

Expected return on plan assets
 
(148
)
 
(137
)
 
(295
)
 
(272
)
Prior service cost amortization
 

 

 

 

Net gain recognition
 

 

 

 

Net periodic benefit cost
 
$
(69
)
 
$
(53
)
 
$
(137
)
 
$
(105
)


During the fourth quarter of 2018, the Company notified the Alliance pension plan participants, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation of its intention to terminate the plan. The Company anticipates completing the pension plan termination in the second half of 2019. As of June 30, 2019, the valuation of the benefit obligations and estimated future benefit payments did not include termination assumptions.


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Table of Contents

Beneficial Associate Pension and other postretirement benefits plans
On March 1, 2019, we closed our acquisition of Beneficial. At the time of the acquisition, we assumed the pension plan covering certain eligible Beneficial Associates. The plan was frozen in 2008.
The following table presents the components of net periodic benefit cost related to the Beneficial pension benefits and other postretirement benefit plans.
 
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
(Dollars in thousands)
 
Pension Benefits
 
Other Postretirement Benefits
Service cost
 
$

 
$

 
$
23

 
$
30

Interest cost
 
857

 
1,142

 
177

 
236

Expected return on plan assets
 
(1,442
)
 
(1,923
)
 

 

Prior service cost amortization
 

 

 

 

Net gain recognition
 

 

 

 

Net periodic benefit cost
 
$
(585
)
 
$
(781
)
 
$
200

 
$
266








                   

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Table of Contents

13. INCOME TAXES
We account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based on changes in business factors and tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.
ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.
There were no unrecognized tax benefits as of June 30, 2019. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2015 through 2018 tax years are subject to examination as of June 30, 2019. We do not expect to record or realize any material unrecognized tax benefits during 2019.
As a result of the adoption of ASU No. 2014-01, Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects, the amortization of our low-income housing credit investments has been reflected as income tax expense. Accordingly, $0.6 million and $0.5 million of such amortization has been reflected as income tax expense for the three months ended June 30, 2019 and 2018, respectively, and $1.3 million and $0.9 million of such amortization has been reflected as income tax expense for the six months ended June 30, 2019 and 2018, respectively .
The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the six months ended June 30, 2019 were $1.2 million, $1.3 million and $0.2 million, respectively. The carrying value of the investment in affordable housing credits is $15.6 million at June 30, 2019, compared to $16.9 million at December 31, 2018.
14. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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Table of Contents

The following tables present financial instruments carried at fair value as of June 30, 2019 and December 31, 2018 by level in the valuation hierarchy (as described above):
 
 
June 30, 2019
(Dollars in thousands)
 
Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
CMO
 
$

 
$
372,235

 
$

 
$
372,235

FNMA MBS
 

 
1,052,395

 

 
1,052,395

FHLMC MBS
 

 
336,583

 

 
336,583

GNMA MBS
 

 
35,657

 

 
35,657

Other assets
 

 
4,995

 

 
4,995

Total assets measured at fair value on a recurring basis
 
$

 
$
1,801,865

 
$

 
$
1,801,865

 
 
 
 
 
 
 
 
 
Liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Other liabilities
 
$

 
$
4,562

 
$

 
$
4,562

 
 
 
 
 
 
 
 
 
Assets measured at fair value on a nonrecurring basis:
 
 
 
 
 
 
 
 
Other investments
 
$

 
$

 
$
48,711

 
$
48,711

Other real estate owned
 

 

 
3,703

 
3,703

Loans held for sale
 

 
51,721

 

 
51,721

Impaired loans, net
 

 

 
49,458

 
49,458

Total assets measured at fair value on a nonrecurring basis
 
$

 
$
51,721

 
$
101,872

 
$
153,593


 
 
December 31, 2018
(Dollars in thousands)
 
Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
CMO
 
$

 
$
371,750

 
$

 
$
371,750

FNMA MBS
 

 
644,073

 

 
644,073

FHLMC MBS
 

 
153,922

 

 
153,922

GNMA MBS
 

 
35,334

 

 
35,334

Other assets
 

 
2,098

 

 
2,098

Total assets measured at fair value on a recurring basis
 
$

 
$
1,207,177

 
$

 
$
1,207,177

 
 
 
 
 
 
 
 
 
Liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Other liabilities
 
$

 
$
3,493

 
$

 
$
3,493

 
 
 
 
 
 
 
 
 
Assets measured at fair value on a nonrecurring basis
 
 
 
 
 
 
 
 
Other investments
 

 

 
37,233

 
37,233

Other real estate owned
 

 

 
2,668

 
2,668

Loans held for sale
 

 
25,318

 

 
25,318

Impaired loans, net
 

 

 
47,094

 
47,094

Total assets measured at fair value on a nonrecurring basis
 
$

 
$
25,318

 
$
86,995

 
$
112,313


There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2019.

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Table of Contents

Fair value is based on quoted market prices, where available. If such quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Available-for-sale securities
As of June 30, 2019, securities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are $1.8 billion in Federal Agency MBS. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 because, as with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.
Other investments
Other investments includes our investments in equity securities without readily determinable fair values. These investments include, among others, our Visa Class B shares and our investments in Spring EQ and SoFi, all of which are categorized as Level 3. Our Visa Class B ownership includes shares acquired at no cost from our prior participation in Visa’s network while Visa operated as a cooperative as well as shares subsequently acquired through private transactions and auctions.
Our equity investments without readily determinable fair values are held at cost, and are adjusted for any observable transactions during the reporting period. As a result of our adoption of ASU 2016-01 and observable market transactions, we recorded unrealized gains on our investments in Visa Class B shares and Spring EQ of $4.8 million during the six months ended June 30, 2019 as compared to $15.3 million during the six months ended June 30, 2018.
Other real estate owned
Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.
Loans held for sale
The fair value of our loans held for sale is based on estimates using Level 2 inputs. These inputs are based on pricing information obtained from wholesale mortgage banks and brokers and applied to loans with similar interest rates and maturities.
Impaired loans
We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which typically ranges from 10% - 20%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
The gross amount of impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans was $54.6 million and $49.4 million at June 30, 2019 and December 31, 2018, respectively. The valuation allowance on impaired loans was $5.2 million as of June 30, 2019 and $2.3 million as of December 31, 2018.

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Table of Contents

FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents
For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.
Investment securities
Fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology as described above in available-for-sale securities.
Other investments
Other investments includes our investments in equity securities with and without readily determinable fair values (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans held for sale
Loans held for sale are carried at their fair value (see discussion in “Fair Value of Financial Assets and Liabilities” section above).
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial small business leases, commercial mortgages, owner-occupied commercial, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans, with the exception of reverse mortgages, are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair values of reverse mortgages are based on the net present value of the expected cash flows using a discount rate specific to the reverse mortgages portfolio. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are used if appraisals are not available. This technique does contemplate an exit price.
Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh
The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.
Other assets
Other assets includes, among other things, investments in subsidiaries, prepaid expenses, interest and fee income receivable, derivative financial instruments and deferred tax assets (see discussion in “Fair Value of Financial Assets and Liabilities” section above).


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Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.
Borrowed funds
Rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Other Liabilities
Other liabilities includes, among others, cash flow derivatives and derivatives on the residential mortgage held for sale pipeline. Valuation of our cash flow derivatives is obtained from an independent pricing service and also from the derivative counterparty. Valuation of the derivative related to the residential mortgage held for sale pipeline is based on valuation of the loans held for sale portfolio as described above in Loans held for sale.
Off-balance sheet instruments
The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either us or the borrower, they only have value to us and the borrower.
The book value and estimated fair value of our financial instruments are as follows:
 
 
 
 
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
 
Fair Value
Measurement
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
521,825

 
$
521,825

 
$
620,757

 
$
620,757

Investment securities available for sale
 
See previous table
 
1,796,870

 
1,796,870

 
1,205,079

 
1,205,079

Investment securities held to maturity
 
Level 2
 
143,317

 
145,867

 
149,950

 
149,431

Other investments
 
Level 3
 
48,711

 
48,711

 
37,233

 
37,233

Loans, held for sale
 
Level 2
 
51,721

 
51,721

 
25,318

 
25,318

Loans, net(1)(2)
 
Level 3
 
8,518,251

 
8,739,014

 
4,816,825

 
4,772,377

Impaired loans, net
 
Level 3
 
49,458

 
49,458

 
47,094

 
47,094

Stock in FHLB of Pittsburgh
 
Level 2
 
15,874

 
15,874

 
19,259

 
19,259

Accrued interest receivable
 
Level 2
 
40,784

 
40,784

 
22,001

 
22,001

Other assets
 
Level 2
 
4,995

 
4,995

 
2,098

 
2,098

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
Level 2
 
9,594,710

 
9,680,779

 
5,640,431

 
5,597,227

Borrowed funds
 
Level 2
 
415,131

 
415,155

 
699,788

 
694,526

Standby letters of credit
 
Level 3
 
407

 
407

 
495

 
495

Accrued interest payable
 
Level 2
 
7,064

 
7,064

 
1,900

 
1,900

Other liabilities
 
Level 2
 
4,562

 
4,579

 
3,493

 
3,493

 (1) Excludes impaired loans, net.
 (2) Includes reverse mortgage loans.
At June 30, 2019 and December 31, 2018 we had no commitments to extend credit measured at fair value.

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15. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both economic conditions and our business operations. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities. We manage a matched book with respect to our derivative instruments in order to minimize our net risk exposure resulting from such transactions.
Fair Values of Derivative Instruments
The table below presents the fair value of our derivative financial instruments as well as their location on the unaudited Consolidated Statements of Financial Condition as of June 30, 2019.
 
Fair Values of Derivative Instruments
(Dollars in thousands)
 
Count
 
Notional
 
Balance Sheet Location
 
Derivatives
(Fair Value)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
3
 
$
75,000

 
Other Liabilities
 
$
(1,075
)
Total
 
 
 
$
75,000

 
 
 
$
(1,075
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
$
80,996

 
Other Assets
 
$
3,043

Interest rate products
 
 
 
80,996

 
Other Liabilities
 
(3,247
)
Risk participation agreements
 
 
 
5,455

 
Other Liabilities
 
(7
)
Interest rate lock commitments with customers

 
 
108,345

 
Other Assets
 
1,727

Interest rate lock commitments with customers

 
 
5,693

 
Other Liabilities
 
(13
)
Forward sale commitments

 
 
47,607

 
Other Assets
 
225

Forward sale commitments

 
 
65,116

 
Other Liabilities
 
(220
)
Total

 
 
$
394,208

 
 
 
$
1,508

Total derivatives

 
 
$
469,208

 
 
 
$
433


The table below presents the fair value of our derivative financial instruments as well as their location on the Consolidated Statements of Financial Condition as of December 31, 2018.
 
Fair Values of Derivative Instruments
(Dollars in thousands)
 
Count
 
Notional
 
Balance Sheet Location
 
Derivatives
(Fair Value)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
3
 
$
75,000

 
Other Liabilities
 
$
(3,308
)
Total
 
 
 
$
75,000

 
 
 
$
(3,308
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate lock commitments with customers

 
 
$
40,795

 
Other Assets
 
$
686

Interest rate lock commitments with customers

 
 
6,530

 
Other Liabilities
 
(24
)
Forward sale commitments

 
 
19,732

 
Other Assets
 
143

Forward sale commitments

 
 
25,876

 
Other Liabilities
 
(161
)
Total

 
 
$
92,933

 
 
 
$
644

Total derivatives

 
 
$
167,933

 
 
 
$
(2,664
)





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Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest income and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.
Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings. During the six months ended June 30, 2019, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest income as interest payments are received on our variable-rate pooled loans. During the next twelve months, we estimate that $0.6 million will be reclassified as an increase to interest income. During the six months ended June 30, 2019, $0.7 million was reclassified into interest income.
We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of one month (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
As of June 30, 2019, we had three outstanding interest rate derivatives with an aggregate notional amount of $75 million that were designated as cash flow hedges of interest rate risk.
Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the derivative financial instruments on the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2019 and June 30, 2018.
 
 
Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion)
 
Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion)
 
Location of (Loss) or Gain Reclassified from Accumulated OCI into Income (Effective Portion)
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Derivatives in Cash Flow Hedging Relationships
 
2019
 
2018
 
2019
 
2018
 
 
Interest Rate Products
 
$
(1,007
)
 
$
(246
)
 
$
(1,637
)
 
$
(1,010
)
 
Interest income
Total
 
$
(1,007
)
 
$
(246
)
 
$
(1,637
)
 
$
(1,010
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) Recognized in Income
 
Amount of Gain or (Loss) Recognized in Income
 
Location of Gain or (Loss) Recognized in Income
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Derivatives Not Designated as a Hedging Instrument
 
2019
 
2018
 
2019
 
2018
 
 
Interest Rate Lock Commitments
 
$
542

 
$
96

 
$
1,174

 
$
(296
)
 
Mortgage banking activities, net
Forward Sale Commitments
 
(487
)
 
$
60

 
(721
)
 
$
(332
)
 
Mortgage banking activities, net
Total
 
$
55

 
$
156

 
$
453

 
$
(628
)
 
 


Credit risk-related Contingent Features
We have agreements with certain derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.
We also have agreements with certain derivative counterparties that contain a provision where if we fail to maintain our status as a well-capitalized or adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.
As of June 30, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.2 million. We have minimum collateral posting thresholds with certain of our derivative counterparties, and have posted collateral of $6.6 million against our obligations under these agreements. If we had breached any of these provisions at June 30, 2019, we could have been required to settle our obligations under the agreements at the termination value.

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16. SEGMENT INFORMATION
As defined in ASC 280, Segment Reporting (ASC 280), an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax net income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying unaudited Consolidated Financial Statements. Based on these criteria, we have identified three segments: WSFS Bank, Cash Connect®, and Wealth Management.
The WSFS Bank segment provides financial products to commercial and retail customers. Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS Bank. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Accordingly, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.
Our Cash Connect® segment provides ATM vault cash, smart safe and other cash logistics services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. Cash Connect® services non-bank and WSFS-branded ATMs and retail safes nationwide. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect®.
The Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate, and institutional clients through multiple integrated businesses.  WSFS Wealth Investments provides financial advisory services along with insurance and brokerage products. Cypress, a registered investment adviser, is a fee-only wealth management firm managing a “balanced” investment style portfolio focused on preservation of capital and generating current income. West Capital, a registered investment adviser, is a fee-only wealth management firm operating under a multi-family office philosophy to provide customized solutions to institutions and high-net-worth individuals. The institutional trust division of WSFS (doing business as WSFS Institutional Services) provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients. The personal trust division of WSFS (doing business as Christiana Trust) provides personal trust and fiduciary services to families and individuals across the U.S. Powdermill is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Client Management serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management units to provide comprehensive solutions to clients.


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The following tables show segment results for the three and six months ended June 30, 2019 and 2018:
 
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statements of Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
140,231

 
$

 
$
2,672

 
$
142,903

 
$
69,599

 
$

 
$
2,552

 
$
72,151

Noninterest income
 
18,870

 
13,355

 
10,646

 
42,871

 
12,045

 
12,328

 
10,614

 
34,987

Total external customer revenues
 
159,101

 
13,355

 
13,318

 
185,774

 
81,644

 
12,328

 
13,166

 
107,138

Inter-segment revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
3,345

 

 
4,052

 
7,397

 
3,565

 

 
2,670

 
6,235

Noninterest income
 
2,156

 
192

 
211

 
2,559

 
2,219

 
200

 
37

 
2,456

Total inter-segment revenues
 
5,501

 
192

 
4,263

 
9,956

 
5,784

 
200

 
2,707

 
8,691

Total revenue
 
164,602

 
13,547

 
17,581

 
195,730

 
87,428

 
12,528

 
15,873

 
115,829

External customer expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
18,282

 

 
1,389

 
19,671

 
10,599

 

 
563

 
11,162

Noninterest expenses
 
91,415

 
8,893

 
7,540

 
107,848

 
42,505

 
7,905

 
7,421

 
57,831

Provision for loan losses
 
12,239

 

 
(44
)
 
12,195

 
2,284

 

 
214

 
2,498

Total external customer expenses
 
121,936

 
8,893

 
8,885

 
139,714

 
55,388

 
7,905

 
8,198

 
71,491

Inter-segment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
4,052

 
2,203

 
1,142

 
7,397

 
2,670

 
2,516

 
1,049

 
6,235

Noninterest expenses
 
403

 
698

 
1,458

 
2,559

 
237

 
637

 
1,582

 
2,456

Total inter-segment expenses
 
4,455

 
2,901

 
2,600

 
9,956

 
2,907

 
3,153

 
2,631

 
8,691

Total expenses
 
126,391

 
11,794

 
11,485

 
149,670

 
58,295

 
11,058

 
10,829

 
80,182

Income before taxes
 
$
38,211

 
$
1,753

 
$
6,096

 
$
46,060

 
$
29,133

 
$
1,470

 
$
5,044

 
$
35,647

Income tax provision
 
 
 
 
 
 
 
10,091

 
 
 
 
 
 
 
6,907

Consolidated net income
 
 
 
 
 
 
 
35,969

 
 
 
 
 
 
 
28,740

Net loss attributable to noncontrolling interest
 
 
 
 
 
 
 
(231
)
 
 
 
 
 
 
 

Net income attributable to WSFS
 
 
 
 
 
 
 
36,200

 
 
 
 
 
 
 
28,740



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Table of Contents

 
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statements of Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External customer revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
237,177

 
$

 
$
5,303

 
$
242,480

 
$
134,889

 
$

 
$
4,875

 
$
139,764

Noninterest income
 
36,134

 
25,757

 
22,102

 
83,993

 
38,651

 
23,681

 
20,122

 
82,454

Total external customer revenues
 
273,311

 
25,757

 
27,405

 
326,473

 
173,540

 
23,681

 
24,997

 
222,218

Inter-segment revenues:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
7,137

 

 
8,057

 
15,194

 
6,533

 

 
5,033

 
11,566

Noninterest income
 
4,039

 
369

 
397

 
4,805

 
4,327

 
381

 
71

 
4,779

Total inter-segment revenues
 
11,176

 
369

 
8,454

 
19,999

 
10,860

 
381

 
5,104

 
16,345

Total revenue
 
284,487

 
26,126

 
35,859

 
346,472

 
184,400

 
24,062

 
30,101

 
238,563

External customer expenses:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
33,418

 

 
2,516

 
35,934

 
20,102

 

 
959

 
21,061

Noninterest expenses
 
173,992

 
16,923

 
14,525

 
205,440

 
81,940

 
15,224

 
14,079

 
111,243

Provision for loan losses
 
19,525

 

 
324

 
19,849

 
5,945

 

 
203

 
6,148

Total external customer expenses
 
226,935

 
16,923

 
17,365

 
261,223

 
107,987

 
15,224

 
15,241

 
138,452

Inter-segment expenses:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
8,057

 
4,761

 
2,376

 
15,194

 
5,033

 
4,575

 
1,958

 
11,566

Noninterest expenses
 
766

 
1,243

 
2,796

 
4,805

 
452

 
1,309

 
3,018

 
4,779

Total inter-segment expenses
 
8,823

 
6,004

 
5,172

 
19,999

 
5,485

 
5,884

 
4,976

 
16,345

Total expenses
 
235,758

 
22,927

 
22,537

 
281,222

 
113,472

 
21,108

 
20,217

 
154,797

Income before taxes
 
$
48,729

 
$
3,199

 
$
13,322

 
$
65,250

 
$
70,928

 
$
2,954

 
$
9,884

 
$
83,766

Income tax provision
 
 
 
 
 
 
 
16,351

 
 
 
 
 
 
 
17,676

Consolidated net income
 
 
 
 
 
 
 
48,899

 
 
 
 
 
 
 
66,090

Net loss attributable to noncontrolling interest
 
 
 
 
 
 
 
(324
)
 
 
 
 
 
 
 

Net income attributable to WSFS
 
 
 
 
 
 
 
49,223

 
 
 
 
 
 
 
66,090


The following table shows significant components of segment net assets as of June 30, 2019 and December 31, 2018:
 
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
 
WSFS Bank
 
Cash
Connect
®
 
Wealth
Management
 
Total
Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
167,173

 
$
345,971

 
$
8,681

 
$
521,825

 
$
115,147

 
$
491,863

 
$
13,747

 
$
620,757

Goodwill
 
453,513

 

 
20,199

 
473,712

 
145,808

 

 
20,199

 
166,007

Other segment assets
 
10,938,718

 
6,875

 
215,465

 
11,161,058

 
6,225,820

 
7,743

 
228,543

 
6,462,106

Total segment assets
 
$
11,559,404

 
$
352,846

 
$
244,345

 
$
12,156,595

 
$
6,486,775

 
$
499,606

 
$
262,489

 
$
7,248,870

Capital expenditures
 
$
5,240

 
$
71

 
$
130

 
$
5,441

 
$
4,779

 
$
375

 
$
344

 
$
5,498





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17. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales
Given the current interest rate environment and our overall asset and liability management approach, we typically sell newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to government sponsored entities (GSEs) such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on our unaudited Consolidated Statements of Financial Condition at fair value with changes in the value reflected in our unaudited Consolidated Statements of Income. Gains and losses are recognized at the time of sale. We periodically retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in our intangible assets in our unaudited Consolidated Statements of Financial Condition. Otherwise, we sell loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that we intend to sell in the secondary market are accounted for as derivatives under ASC Topic 815, Derivatives and Hedging (ASC 815).
We do not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There was one repurchase for $0.2 million during the six months ended June 30, 2019.
Swap Guarantees
We entered into agreements with seven unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives
At June 30, 2019 and December 31, 2018, there were 168 and 136 variable-rate to fixed-rate swap transactions between the third party financial institutions and our customers, respectively. The initial notional aggregate amount was approximately $766.1 million at June 30, 2019 compared to $581.5 million at December 31, 2018. At June 30, 2019, maturities ranged from under 1 year to 15 years. The aggregate market value of these swaps to the customers was a liability of $25.1 million at June 30, 2019 and a liability of $0.3 million at December 31, 2018. At June 30, 2019, 146 swaps, with a liability of $26.1 million, were in paying positions to a third party. We had no reserves for these swap guarantees as of June 30, 2019.

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18. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes unrealized gains and losses on available-for-sale investments, unrealized gains and losses on cash flow hedges, as well as unrecognized prior service costs, transition costs, and actuarial gains and losses on defined benefit pension plans. Changes to accumulated other comprehensive loss are presented, net of tax, as a component of stockholders’ equity. Amounts that are reclassified out of accumulated other comprehensive loss are recorded on the unaudited Consolidated Statement of Income either as a gain or loss.
Changes to accumulated other comprehensive loss by component are shown, net of taxes, in the following tables for the period indicated:
(Dollars in thousands)
 
Net change in
investment
securities
available for sale
 
Net change
in investment securities
held to
maturity
 
Net
change in
defined
benefit
plan
 
Net change in
fair value of
derivatives
used for cash
flow hedges
 
Total
Balance, March 31, 2019
 
$
2,701

 
$
686

 
$
693

 
$
(1,824
)
 
$
2,256

Other comprehensive income before reclassifications
 
19,591

 

 
10

 
1,007

 
20,608

Less: Amounts reclassified from accumulated other comprehensive (loss) income
 
(48
)
 
(84
)
 
(44
)
 

 
(176
)
Net current-period other comprehensive income (loss)
 
19,543

 
(84
)
 
(34
)
 
1,007

 
20,432

Balance, June 30, 2019
 
$
22,244

 
$
602

 
$
659

 
$
(817
)
 
$
22,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2018
 
$
(19,685
)
 
$
1,104

 
$
924

 
$
(3,163
)
 
$
(20,820
)
Other comprehensive income (loss) before reclassifications
 
(4,501
)
 

 
8

 
(245
)
 
(4,738
)
Less: Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(117
)
 
(38
)
 

 
(155
)
Net current-period other comprehensive (loss) income
 
(4,501
)
 
(117
)
 
(30
)
 
(245
)
 
(4,893
)
Balance, June 30, 2018
 
$
(24,186
)
 
$
987

 
$
894

 
$
(3,408
)
 
$
(25,713
)


(Dollars in thousands)
 
Net change in
investment
securities
available for sale
 
Net change
in investment securities
held to
maturity
 
Net
change in
defined
benefit
plan
 
Net change in
fair value of
derivatives
used for cash
flow hedges
 
Total
Balance, December 31, 2018
 
$
(14,553
)
 
$
779

 
$
834

 
$
(2,454
)
 
$
(15,394
)
Other comprehensive income (loss) before reclassifications
 
36,856

 
(2
)
 
(89
)
 
1,637

 
38,402

Less: Amounts reclassified from accumulated other comprehensive (loss) income
 
(59
)
 
(175
)
 
(86
)
 

 
(320
)
Net current-period other comprehensive income (loss)
 
36,797

 
(177
)
 
(175
)
 
1,637

 
38,082

Balance, June 30, 2019
 
$
22,244

 
$
602

 
$
659

 
$
(817
)
 
$
22,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
$
(7,842
)
 
$
1,223

 
$
865

 
$
(2,398
)
 
$
(8,152
)
Other comprehensive income (loss) before reclassifications
 
(16,328
)
 

 
8

 
(1,010
)
 
(17,330
)
Less: Amounts reclassified from accumulated other comprehensive income (loss)
 
(16
)
 
(236
)
 
21

 

 
(231
)
Net current-period other comprehensive (loss) income
 
(16,344
)
 
(236
)
 
29

 
(1,010
)
 
(17,561
)
Balance, June 30, 2018
 
$
(24,186
)
 
$
987

 
$
894

 
$
(3,408
)
 
$
(25,713
)



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The unaudited Consolidated Statements of Income were impacted by components of other comprehensive income (loss) as shown in the table below:
 
 
Three Months Ended June 30,
 
Affected line item in unaudited Consolidated Statements of Income
(Dollars in thousands)
 
2019
 
2018
 
Securities available for sale:
 
 
 
 
 
 
Realized gains on securities transactions
 
$
(63
)
 
$

 
Securities gains, net
Income taxes
 
15

 

 
Income tax provision
Net of tax
 
$
(48
)
 
$

 
 
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
 
 
 
 
 
 
Amortization of net unrealized gains to income during the period
 
$
(111
)
 
$
(153
)
 
Interest and dividends on investment securities
Income taxes
 
27

 
36

 
Income tax provision
Net of tax
 
$
(84
)
 
$
(117
)
 
 
Amortization of Defined Benefit Pension items:
 
 
 
 
 
 
Prior service costs (credits) (1)
 
$
(19
)
 
$
(19
)
 
 
Actuarial gains
 
(16
)
 
(12
)
 
 
Total before tax
 
$
(35
)
 
$
(31
)
 
Salaries, benefits and other compensation
Income taxes
 
(9
)
 
(7
)
 
Income tax provision
Net of tax
 
(44
)
 
(38
)
 
 
Total reclassifications
 
$
(176
)
 
$
(155
)
 
 

 
 
Six Months Ended June 30,
 
Affected line item in unaudited Consolidated Statements of Income
(Dollars in thousands)
 
2019
 
2018
 
Securities available for sale:
 
 
 
 
 
 
Realized gains on securities transactions
 
$
(78
)
 
$
(21
)
 
Securities gains, net
Income taxes
 
19

 
5

 
Income tax provision
Net of tax
 
$
(59
)
 
$
(16
)
 
 
Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:
 
 
 
 
 
 
Amortization of net unrealized gains to income during the period
 
$
(231
)
 
$
(309
)
 
Interest and dividends on investment securities
Income taxes
 
56

 
73

 
Income tax provision
Net of tax
 
$
(175
)
 
$
(236
)
 
 
Amortization of Defined Benefit Pension items:
 
 
 
 
 
 
Prior service costs (credits) (1)
 
$
(38
)
 
$
40

 
 
Transition obligation
 

 

 
 
Actuarial gains
 
(31
)
 
(23
)
 
 
Total before tax
 
$
(69
)
 
$
17

 
Salaries, benefits and other compensation
Income taxes
 
(17
)
 
4

 
Income tax provision
Net of tax
 
(86
)
 
21

 
 
Total reclassifications
 
$
(320
)
 
$
(231
)
 
 
(1) 
Prior service costs balance for the six months ended June 30, 2018 includes a tax true-up adjustment of $0.1 million from March 31, 2018. Note that the tax true-up was made to the deferred tax asset with an offset to AOCI and does not affect the actual net periodic benefit costs of the pension plan.

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19. RELATED PARTY TRANSACTIONS
In the ordinary course of business, from time to time we enter into transactions with related parties, including, but not limited to, our officers and directors. These transactions are made on substantially the same terms and conditions, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other customers. They do not, in the opinion of management, involve greater than normal credit risk or include other features unfavorable to us. Any related party loans exceeding $0.5 million require review and approval by the Board of Directors. During the second quarter of 2019, there were no loans to related parties exceeding $0.5 million.
The outstanding balances of loans to related parties at June 30, 2019 and December 31, 2018 were $1.0 million and $1.2 million, respectively. Total deposits from related parties at June 30, 2019 and December 31, 2018 were $8.3 million and $5.4 million, respectively. During the second quarter of 2019, new loans and credit line advances to related parties were less than $0.1 million and repayments were $0.3 million.
20. LEGAL AND OTHER PROCEEDINGS
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation-related matters that arise in the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, our defense of litigation claims may result in legal fees, which we expense as incurred.
As previously disclosed, on February 27, 2018, we entered into a settlement agreement with Universitas Education, LLC (Universitas) to resolve arbitration claims related to services provided by Christiana Bank and Trust Company (CB&T) prior to its acquisition by WSFS in December 2010. In accordance with the litigation settlement, we paid Universitas $12.0 million to fully settle the claims. During the third quarter of 2018, WSFS recovered $7.9 million in settlement and legal costs from insurance carriers that provided coverage relating to the Universitas matter. WSFS is pursuing all of its rights and remedies to recover the remaining amounts relating to the Universitas proceeding, including the Universitas settlement payment, legal fees and related costs, by enforcing the indemnity right in the 2010 purchase agreement by which WSFS acquired CB&T.
In March 2017, Nature’s Healing Trust (NHT) filed a complaint against WSFS Bank in the Delaware Court of Chancery. NHT asserts that WSFS Bank failed to provide timely notice concerning the possible lapse of two life settlement policies (aggregate face amount of $6.3 million) held in the trust. NHT asserts claims against WSFS Bank for breach of contract, breach of fiduciary duty, and negligence, and seeks the face value of the policies. WSFS Bank disputes the factual allegations and denies liability. WSFS Bank has, in accordance with its normal procedures, notified its insurance carriers of a possible claim. WSFS Bank is vigorously defending itself in this matter and believes it has valid factual and legal defenses. The case is currently scheduled to go to trial during the fourth quarter of 2019.
There were no material changes or additions to other significant pending legal or other proceedings involving us other than those arising out of routine operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WSFS Financial Corporation (the Company or WSFS) is a savings and loan holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, Wilmington Savings Fund Society, FSB (WSFS Bank or the Bank), one of the ten oldest bank and trust companies continuously operating under the same name in the United States (U.S.). At $12.2 billion in assets and $19.7 billion in assets under management (AUM) and assets under administration (AUA), WSFS Bank is also the largest bank and trust company headquartered in the Delaware Valley. As a federal savings bank, which was formerly chartered as a state mutual savings bank, the Bank enjoys a broader scope of permissible activities than most other types of financial institutions. A fixture in the community, we have been in operation for more than 187 years. In addition to our focus on stellar customer service, we have continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution. Our mission is simple: “We Stand for Service.” Our strategy of “Engaged Associates, living our culture, making a better life for all we serve” focuses on exceeding customer expectations, delivering stellar experiences and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.
We have five consolidated subsidiaries: WSFS 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 Corporation (BEFC), WSFS Investment Group, Inc. (WSFS Wealth Investments), 1832 Holdings, Inc., and WSFS SPE Services, LLC, and one majority-owned subsidiary, NewLane Finance Company.
Our core banking business is commercial lending funded by customer-generated deposits. We have built a $6.4 billion commercial loan portfolio by recruiting seasoned commercial lenders in our markets, offering the high level of service and flexibility typically associated with a community bank, and through acquisition. We fund this business primarily with deposits generated through commercial relationships and retail deposits. As of June 30, 2019, we service our customers primarily from 147 offices located in Pennsylvania (72), Delaware (49), New Jersey, (24), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches, and mortgage and title services through our branches and Pennsylvania-based WSFS Mortgage. WSFS Mortgage is a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions.
Our leasing business is conducted by NewLane Finance Company (formerly Neumann Finance Company) and BEFC. NewLane Finance Company originates small business leases and provides financing products and services to businesses nationwide, targeting various equipment categories including technology, software, office, medical and other areas. BEFC originates small business leases, primarily medical and veterinary equipment. During the second quarter of 2019, WSFS Bank announced its intention to combine the operations of NewLane Finance Company and BEFC later in 2019.
Our Cash Connect® segment is a premier U.S. provider of ATM vault cash, smart safe and other cash logistics services in the U.S. Cash Connect® manages over $1.3 billion in total cash and services approximately 26,300 non-bank ATMs and approximately 2,700 smart safes nationwide. Cash Connect® provides related services such as online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing equipment sales and deposit safe cash logistics. Cash Connect® also operates 442 ATMs for the Bank, which has one of the largest branded ATM networks in our market.
As a provider of ATM vault cash to the U.S. ATM industry, Cash Connect® is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 19 year history, Cash Connect® periodically has been exposed to losses through theft from armored courier companies and consistently has been able to recover losses through its risk management strategies.

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Our Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate, and institutional clients through multiple integrated businesses.  Combined, these businesses had $19.7 billion of assets under management (AUM) and assets under administration (AUA) at June 30, 2019. WSFS Wealth Investments provides financial advisory services along with insurance and brokerage products. Cypress, a registered investment adviser, is a fee-only wealth management firm managing a “balanced” investment style portfolio focused on preservation of capital and generating current income. West Capital, a registered investment adviser, is a fee-only wealth management firm operating under a multi-family office philosophy to provide customized solutions to institutions and high-net-worth individuals. The institutional trust division of WSFS (doing business as WSFS Institutional Services) provides trustee, agency, bankruptcy administration, custodial and commercial domicile services to institutional and corporate clients. The personal trust division of WSFS (doing business as Christiana Trust) provides personal trust and fiduciary services to families and individuals across the U.S. Powdermill is a multi-family office specializing in providing independent solutions to high-net-worth individuals, families and corporate executives through a coordinated, centralized approach. WSFS Wealth Client Management serves high-net-worth clients by delivering credit and deposit products and partnering with other Wealth Management units to provide comprehensive solutions to clients.
As a provider of trust services to our clients, we are exposed to operational, reputation-related and legal risks due to the inherent complexity of the trust business. To mitigate these risks, we rely on the hiring, development and retention of experienced Associates, financial controls, managerial oversight, and other risk management practices. Also, from time to time our trust business may give rise to disputes with clients and we may be exposed to litigation which could result in significant costs. The ultimate outcome of any litigation is uncertain.

2019 Developments
On March 1, 2019, we acquired Beneficial Bancorp, Inc. (Beneficial), including its subsidiary Beneficial Bank. Subject to the terms and conditions of the Merger Agreement, stockholders of Beneficial received 0.3013 shares of WSFS common stock and $2.93 in cash for each share of Beneficial common stock. See Note 3 to the unaudited Consolidated Financial Statements for further information.
During the second quarter, we completed the sale of five Beneficial Bank retail banking offices in New Jersey, with approximately $177.9 million in deposits to The Bank of Princeton, a New Jersey-based financial institution, at a deposit premium of 7.37%. The sale was part of a previously announced branch optimization plan to consolidate and divest 30 retail banking offices, or 25%, of the combined WSFS and Beneficial branch network. Most of the consolidations will be completed during the conversion and rebranding of the remaining Beneficial banking offices, which is expected to occur in the third quarter of 2019.


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FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $4.9 billion to $12.2 billion at June 30, 2019 compared to December 31, 2018. Net loans, excluding loans held for sale, increased $3.7 billion which includes $3.7 billion of loans acquired from Beneficial. Excluding loans acquired from Beneficial, loans decreased $17.6 million, reflecting declines of $107.9 million in commercial real estate loans and $48.5 million in residential mortgages, partially offset by increases of $84.5 million in Commercial and Industrial (C&I loans) (including owner-occupied), $22.6 million in consumer loans, $15.5 million in commercial small business leases, and $16.1 million in construction loans. Investment securities increased $585.2 million during the six months ended June 30, 2019, primarily the result of our ongoing balance sheet optimization related to our acquisition of Beneficial. Goodwill and intangible assets increased $389.7 million during the six months ended June 30, 2019, due to our acquisition of Beneficial. Other assets increased $191.5 million during the six months ended June 30, 2019, primarily due to a $172.5 million right-of-use asset recorded under ASU 2016-02, Leases. Additionally, Bank Owned Life Insurance (BOLI) increased $23.4 million during the six months ended June 30, 2019, primarily reflecting the value of retained split-dollar BOLI policies acquired from Beneficial. Further, other investments increased $11.5 million during the six months ended June 30, 2019, primarily due to unrealized gains of $4.8 million on our Visa Class B shares and our investment in Spring EQ, in addition to equity investments acquired from Beneficial. These increases were partially offset by a decrease of $98.9 million in cash and cash equivalents, reflecting a decline of $146.6 million from improved cash optimization at Cash Connect®, and $47.0 million of cash from Beneficial. For further information, see the Notes to the unaudited Consolidated Financial Statements.
Total liabilities increased $3.9 billion to $10.3 billion during the six months ended June 30, 2019. Customer funding increased $3.8 billion during the six months ended June 30, 2019, which includes $3.7 billion of customer funding acquired from Beneficial. Excluding the customer funding acquired from Beneficial, customer deposits increased $159.8 million, reflecting increases of $80.1 million in money market accounts and $60.1 million in customer time deposits, partially offset by a decrease of $47.4 million in savings deposits. In addition, other liabilities increased $217.5 million during the six months ended June 30, 2019, primarily due to a $186.2 million lease liability recorded under ASU 2016-02, Leases. Partially offsetting these increases was brokered deposits, which decreased $84.4 million, excluding $209.8 million in brokered deposits acquired from Beneficial. FHLB advances decreased $212.8 million, or 65%, and federal funds purchased decreased $43.0 million during the six months ended June 30, 2019, both due to our ongoing balance sheet optimization related to our acquisition of Beneficial.
Capital Resources
Share Repurchases: During the six months ended June 30, 2019, WSFS repurchased 271,340 shares of common stock at an average price of $41.72 per share following the closing of the Beneficial acquisition as part of our share buyback program approved by the Board of Directors in the fourth quarter of 2018. WSFS has 2,865,638 shares, or slightly more than 5% of outstanding shares, remaining to repurchase under this authorization. As capital levels subsequent to our acquisition of Beneficial are stronger than anticipated, we will continue to execute on the Board approved share buyback plan including increased opportunistic share repurchase above our stated practice of returning a minimum of 25% of annual net income to stockholders through dividends and share repurchases, based on current valuation levels.
In the first quarter of 2019, we repurchased $5.8 million of common stock in connection with the settlement of outstanding stock based compensation awards held by Beneficial Associates at closing.
Stockholders’ equity increased $1.0 billion between December 31, 2018 and June 30, 2019. This increase was primarily due to our acquisition of Beneficial, but also reflects $48.9 million of income attributable to WSFS and $36.8 million from the effect of market-value changes on available-for-sale securities, partially offset by the payment of the common stock dividends of $9.9 million and $17.1 million for share repurchases, described above, for the six months ended June 30, 2019.


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The table below compares the Bank's and the Company’s consolidated capital position to the minimum regulatory requirements as of June 30, 2019:
 
 
 
Consolidated
Capital
 
For Capital
Adequacy Purposes
 
To be Well-Capitalized
Under Prompt Corrective
Action Provisions
(Dollars in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Total Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
$
1,311,045

 
12.93
%
 
$
811,192

 
8.00
%
 
$
1,013,990

 
10.00
%
WSFS Financial Corporation
 
1,375,538

 
13.55
%
 
811,905

 
8.00
%
 
1,014,881

 
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
1,264,110

 
12.47
%
 
608,394

 
6.00
%
 
811,192

 
8.00
%
WSFS Financial Corporation
 
1,328,603

 
13.09
%
 
608,929

 
6.00
%
 
811,905

 
8.00
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
1,264,110

 
12.47
%
 
456,295

 
4.50
%
 
659,093

 
6.50
%
WSFS Financial Corporation
 
1,263,603

 
12.45
%
 
456,697

 
4.50
%
 
659,673

 
6.50
%
Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
 
Wilmington Savings Fund Society, FSB
 
1,264,110

 
10.95
%
 
461,793

 
4.00
%
 
577,241

 
5.00
%
WSFS Financial Corporation
 
1,328,603

 
11.49
%
 
462,668

 
4.00
%
 
578,335

 
5.00
%
Book value per share of common stock was $34.50 at June 30, 2019, an increase of $8.33, or 32% from $26.17 at December 31, 2018. Tangible book value per share of common stock (a non-GAAP financial measure) was $23.69 at June 30, 2019, an increase of $3.45, or 17%, from $20.24 at December 31, 2018.  We believe tangible common book value per share helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP data should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a substitute for, or superior to, GAAP results. For a reconciliation of tangible common book value per share to book value per share in accordance with GAAP, see "Reconciliation of Non-GAAP Measure to GAAP Measure."
Regulators have established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends on its capital levels in relation to various relevant capital measures, which include leveraged and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.
Regulatory capital requirements for the Bank and the Company include a minimum common equity Tier 1 capital ratio of 4.50% of risk-weighted assets, a Tier 1 capital ratio of 6.00% of risk-weighted assets, a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets.
Not included in the Bank’s capital, the Company separately held $173.1 million in cash to support share repurchases, potential dividends, acquisitions, strategic growth plans and other general corporate purposes.
As shown in the table above, as of June 30, 2019, the Bank and the Company were in compliance with regulatory capital requirements and exceeded the amounts required to be considered “well-capitalized” as defined in the regulations.

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Liquidity
We manage our liquidity and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.
We have ready access to several funding sources to fund growth and meet our liquidity needs.  Among these are cash from operations, retail deposit programs, loan repayments, FHLB borrowings, repurchase agreements, access to the Federal Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities, that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to meet our funding needs as well as maintain required and prudent levels of liquidity over the next twelve months.
During the six months ended June 30, 2019, cash and cash equivalents decreased $98.9 million to $521.8 million from $620.8 million as of December 31, 2018. Cash provided by operating activities was $92.2 million, primarily reflecting the cash impact of earnings offset by a $36.0 million increase in net lending activity for loans held for sale during the six months ended June 30, 2019. Cash provided by investing activities was $218.9 million, which included proceeds of $602.4 million from sales of securities (including $578.8 million from sales of securities acquired from Beneficial), $76.1 million in net cash acquired from Beneficial, $59.7 million received from the surrender of the majority of BOLI policies acquired from Beneficial and $26.6 million from net redemptions of FHLB stock. The cash provided by investing activities was partially offset by $529.6 million in net purchases of investment securities as part of our balance sheet optimization and $20.6 million from additional lending activity. Cash used for financing activities was $410.1 million, primarily due to $212.8 million used to repay FHLB advances, a $131.3 million net decrease in deposits, $43.0 million for repayment of federal funds purchased, and $17.1 million for repurchases of common stock, which includes $5.8 million of common stock repurchased in connection with the settlement of outstanding stock based compensation awards held by Beneficial Associates at closing. See Note 3 to the unaudited Consolidated Financial Statements for further information.
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, OREO and restructured loans. Nonaccruing loans are those on which we no longer accrue interest. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.

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The following table shows our nonperforming assets and past due loans at the dates indicated:
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Nonaccruing loans:
 
 
 
 
Commercial and industrial
 
$
21,041

 
$
14,056

Owner-occupied commercial
 
8,753

 
4,406

Commercial mortgages
 
2,302

 
3,951

Construction
 

 
2,781

Residential mortgages
 
3,887

 
2,854

Consumer
 
1,653

 
2,006

Total nonaccruing loans
 
37,636

 
30,054

Other real estate owned
 
3,703

 
2,668

Restructured loans(1)
 
14,203

 
14,953

Total nonperforming assets
 
$
55,542

 
$
47,675

Past due loans:
 
 
 
 
Commercial
 
$
1,165

 
$
71

Residential mortgages
 
115

 
660

Consumer (2)
 
14,387

 
104

Total past due loans
 
$
15,667

 
$
835

Ratio of allowance for loan losses to total gross loans (3)
 
0.53
%
 
0.81
%
Ratio of allowance for loan losses to total gross loans (excluding acquired loans)
 
0.99

 
0.89

Ratio of nonaccruing loans to total gross loans (3)
 
0.44

 
0.62

Ratio of nonperforming assets to total assets
 
0.46

 
0.66

Ratio of allowance for loan losses to nonaccruing loans
 
121

 
132

Ratio of allowance for loan losses to total nonperforming assets(4)
 
82

 
83

(1) 
Accruing loans only, which includes acquired nonimpaired loans. Nonaccruing Troubled Debt Restructurings (TDRs) are included in their respective categories of nonaccruing loans.
(2) 
Includes U.S. government guaranteed student loans with little risk of credit loss
(3) 
Total loans exclude loans held for sale and reverse mortgages.
(4) 
Excludes acquired impaired loans.
Nonperforming assets increased $7.9 million between December 31, 2018 and June 30, 2019. This increase included a $7.6 million increase in nonaccruing loans, primarily due to one $20.2 million C&I relationship that was moved to nonperforming status during the quarter, partially offset by two legacy WSFS C&I loans, previously classified as nonperforming, that experienced significant credit events in the quarter, which resulted in higher levels of provision for loan losses and concurrent charge-offs during the quarter. Restructured loans at June 30, 2019 were essentially flat as compared to December 31, 2018. The ratio of nonperforming assets to total assets improved from 0.66% at December 31, 2018 to 0.46% at June 30, 2019, primarily due to the larger combined balance sheet.
The following table summarizes the changes in nonperforming assets during the periods indicated:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2019
 
2018
Beginning balance
 
$
47,675

 
$
59,000

Additions
 
40,142

 
11,563

Collections
 
(16,637
)
 
(9,069
)
Transfers to accrual
 
(1,120
)
 
(9
)
Charge-offs
 
(14,518
)
 
(6,346
)
Ending balance
 
$
55,542

 
$
55,139

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

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INTEREST RATE SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At June 30, 2019, interest-bearing liabilities exceeded interest-earning assets that mature or reprice within one year (interest-sensitive gap) by $371 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 92.49% at June 30, 2019 compared with 98.67% at December 31, 2018. Likewise, the one-year interest-sensitive gap as a percentage of total assets was (3.05)% at June 30, 2019 compared with (0.57)% at December 31, 2018. The lower one-year interest-sensitive gap along with a more neutral net interest margin resulted from the acquisition of Beneficial.

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, which we are required to perform by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.
The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at June 30, 2019 and December 31, 2018:
 
 
 
June 30, 2019
 
December 31, 2018
% Change in Interest Rate (Basis Points)
 
% Change in Net
Interest Margin(1)
 
Economic Value of Equity(2)
 
% Change in Net
Interest Margin(1)
 
Economic Value of Equity(2)
+300
 
5.1%
 
19.07%
 
8.0%
 
16.93%
+200
 
3.6%
 
19.48%
 
5.0%
 
17.19%
+100
 
1.9%
 
19.77%
 
3.0%
 
17.26%
+50
 
1.0%
 
19.80%
 
1.3%
 
17.25%
+25
 
0.5%
 
19.79%
 
0.7%
 
17.24%
 
—%
 
19.75%
 
—%
 
17.21%
-25
 
(0.5)%
 
19.69%
 
(0.7)%
 
17.16%
-50
 
(1.1)%
 
19.59%
 
(1.5)%
 
17.09%
-100
 
(2.8)%
 
19.27%
 
(4.0)%
 
16.82%
-200
 
(7.0)%
 
18.07%
 
(9.0)%
 
15.87%
-300(3)
 
NMF
 
NMF
 
NMF
 
NMF
(1) 
The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2) 
The economic value of equity ratio of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3) 
Sensitivity indicated by a decrease of 300 basis points is not deemed meaningful (NMF) given the low absolute level of interest rates in the periods presented.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.


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RESULTS OF OPERATIONS
Three months ended June 30, 2019: For the three months ended June 30, 2019, net income was $36.2 million compared with $28.7 million for the three months ended June 30, 2018. Net interest income increased $62.2 million during the three months ended June 30, 2019 compared to three months ended June 30, 2018, primarily due to the acquisition of Beneficial and improved positioning in the higher short-term interest rate environment over the last year. See “Net Interest Income” for further information. Noninterest income for the three months ended June 30, 2019 increased $7.9 million in comparison with the three months ended June 30, 2018, primarily due to growth across most of our business lines and unrealized gains of $1.0 million on our investments in Visa Class B shares and Spring EQ for the three months ended June 30, 2019. See “Noninterest (Fee) Income” for further information. Noninterest expense increased $50.0 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 , primarily due to $15.8 million of corporate development and restructuring costs related to our merger with Beneficial, and higher employee-related costs and other operating costs to support organic and merger-related growth. See “Noninterest Expense” for further information.
Six months ended June 30, 2019: For the six months ended June 30, 2019, net income was $49.2 million compared with $66.1 million for the six months ended June 30, 2018. Net interest income increased $87.8 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due the acquisition of Beneficial, as well as improved positioning in the higher short-term interest rate environment over the last year, pricing discipline, and loan growth. See “Net Interest Income” for further information. Noninterest income for the six months ended June 30, 2019 increased $1.5 million in comparison with the six months ended June 30, 2018, reflecting growth across most of our business lines, partially offset by a decrease of $10.5 million in the amount of unrealized gains on our investments in Visa Class B shares and Spring EQ for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. See “Noninterest (Fee) Income” for further information. Noninterest expense increased $94.2 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to $46.8 million of corporate development and restructuring costs related to our acquisition of Beneficial, and higher employee-related costs and other operating costs to support organic and merger-related growth. See “Noninterest Expense” for further information.

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Net Interest Income
The following table provides information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated:
 
 
Three months ended June 30,
 
 
2019
 
2018
(Dollars in thousands)
 
Average
Balance
 
Interest
 
Yield/
Rate(1)
 
Average
Balance
 
Interest
 
Yield/
Rate(1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
 
$
2,857,091

 
$
45,458

 
6.38
%
 
$
1,437,117

 
$
19,394

 
5.41
%
Residential real estate loans
 
1,102,362

 
15,359

 
5.57

 
239,054

 
3,516

 
5.88

Commercial loans
 
3,571,559

 
51,798

 
5.83

 
2,574,777

 
33,375

 
5.22

Consumer loans
 
1,126,385

 
15,958

 
5.68

 
600,683

 
7,847

 
5.24

Loans held for sale
 
37,728

 
428

 
4.55

 
23,680

 
310

 
5.25

Total loans
 
8,695,125

 
129,001

 
5.96

 
4,875,311

 
64,442

 
5.31

Mortgage-backed securities(3)
 
1,653,582

 
12,229

 
2.96

 
934,411

 
6,190

 
2.65

Investment securities(3)
 
146,064

 
1,030

 
3.39

 
158,266

 
1,108

 
3.41

Other interest-earning assets
 
89,145

 
643

 
2.89

 
26,815

 
411

 
6.15

Total interest-earning assets
 
10,583,916

 
142,903

 
5.43
%
 
5,994,803

 
72,151

 
4.85
%
Allowance for loan losses
 
(46,719
)
 
 
 
 
 
(41,682
)
 
 
 
 
Cash and due from banks
 
112,657

 
 
 
 
 
127,293

 
 
 
 
Cash in non-owned ATMs
 
364,236

 
 
 
 
 
531,524

 
 
 
 
Bank-owned life insurance
 
56,332

 
 
 
 
 
5,724

 
 
 
 
Other noninterest-earning assets
 
1,052,544

 
 
 
 
 
354,392

 
 
 
 
Total assets
 
$
12,122,966

 
 
 
 
 
$
6,972,054

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
2,029,361

 
$
2,163

 
0.43
%
 
$
973,498

 
$
921

 
0.38
%
Money market
 
1,936,112

 
4,932

 
1.02

 
1,390,675

 
1,823

 
0.53

Savings
 
1,657,790

 
2,009

 
0.49

 
566,766

 
260

 
0.18

Customer time deposits
 
1,476,763

 
5,100

 
1.39

 
657,332

 
1,990

 
1.21

Total interest-bearing customer deposits
 
7,100,026

 
14,204

 
0.80

 
3,588,271

 
4,994

 
0.56

Brokered certificates of deposit
 
307,514

 
1,919

 
2.50

 
317,539

 
1,374

 
1.74

Total interest-bearing deposits
 
7,407,540

 
16,123

 
0.87

 
3,905,810

 
6,368

 
0.65

Federal Home Loan Bank advances
 
134,151

 
806

 
2.41

 
516,411

 
2,536

 
1.97

Trust preferred borrowings
 
67,011

 
717

 
4.29

 
67,011

 
637

 
3.81

Senior debt
 
98,464

 
1,180

 
4.79

 
98,247

 
1,180

 
4.80

Other borrowed funds(4)
 
161,903

 
845

 
2.09

 
131,776

 
441

 
1.34

Total interest-bearing liabilities
 
7,869,069

 
19,671

 
1.00
%
 
4,719,255

 
11,162

 
0.95
%
Noninterest-bearing demand deposits
 
2,126,640

 
 
 
 
 
1,420,988

 
 
 
 
Other noninterest-bearing liabilities
 
315,108

 
 
 
 
 
74,395

 
 
 
 
Stockholders’ equity
 
1,812,302

 
 
 
 
 
757,416

 
 
 
 
Noncontrolling interest
 
(153
)
 
 
 
 
 

 
 
 
 
Total liabilities and stockholders’ equity
 
$
12,122,966

 
 
 
 
 
$
6,972,054

 
 
 
 
Excess of interest-earning assets over interest-bearing liabilities
 
$
2,714,847

 
 
 
 
 
$
1,275,548

 
 
 
 
Net interest and dividend income
 
 
 
$
123,232

 
 
 
 
 
$
60,989

 
 
Interest rate spread
 
 
 
 
 
4.43
%
 
 
 
 
 
3.90
%
Net interest margin
 
 
 
 
 
4.68
%
 
 
 
 
 
4.10
%
(1) 
Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2) 
Average balances are net of unearned income and include nonperforming loans.
(3) 
Includes securities available for sale at fair value.
(4) 
Includes federal funds purchased.


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Six months ended June 30,
 
 
2019
 
2018
(Dollars in thousands)
 
Average
Balance
 
Interest
 
Yield/
Rate(1)
 
Average
Balance
 
Interest
 
Yield/
Rate(1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
 
$
2,416,011

 
$
73,978

 
6.17
%
 
$
1,438,852

 
$
37,559

 
5.26
%
Residential real estate loans
 
817,109

 
22,958

 
5.62

 
243,489

 
7,348

 
6.04

Commercial loans
 
3,214,989

 
91,032

 
5.72

 
2,568,527

 
64,584

 
5.09

Consumer loans
 
985,248

 
27,425

 
5.61

 
586,907

 
14,928

 
5.13

Loans held for sale
 
29,153

 
725

 
5.01

 
20,041

 
488

 
4.92

Total loans
 
7,462,510

 
216,118

 
5.85

 
4,857,816

 
124,907

 
5.19

Mortgage-backed securities(3)
 
1,545,968

 
22,695

 
2.94

 
888,401

 
11,589

 
2.61

Investment securities(3)
 
147,587

 
2,074

 
3.40

 
159,398

 
2,228

 
3.43

Other interest-earning assets
 
84,108

 
1,593

 
3.82

 
29,993

 
1,040

 
6.99

Total interest-earning assets
 
9,240,173

 
242,480

 
5.31
%
 
5,935,608

 
139,764

 
4.77
%
Allowance for loan losses
 
(43,593
)
 
 
 
 
 
(41,574
)
 
 
 
 
Cash and due from banks
 
110,231

 
 
 
 
 
123,679

 
 
 
 
Cash in non-owned ATMs
 
395,920

 
 
 
 
 
526,608

 
 
 
 
Bank-owned life insurance
 
45,754

 
 
 
 
 
46,166

 
 
 
 
Other noninterest-earning assets
 
870,940

 
 
 
 
 
345,661

 
 
 
 
Total assets
 
$
10,619,425

 
 
 
 
 
$
6,936,148

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
1,708,010

 
$
3,899

 
0.46
%
 
$
984,522

 
$
1,737

 
0.36
%
Money market
 
1,792,371

 
8,771

 
0.99

 
1,388,766

 
3,412

 
0.50

Savings
 
1,304,443

 
2,881

 
0.45

 
560,150

 
514

 
0.19

Customer time deposits
 
1,226,003

 
8,364

 
1.38

 
640,034

 
3,675

 
1.16

Total interest-bearing customer deposits
 
6,030,827

 
23,915

 
0.80

 
3,573,472

 
9,338

 
0.53

Brokered certificates of deposit
 
260,854

 
3,150

 
2.44

 
286,098

 
2,270

 
1.60

Total interest-bearing deposits
 
6,291,681

 
27,065

 
0.87

 
3,859,570

 
11,608

 
0.61

Federal Home Loan Bank advances
 
268,311

 
3,396

 
2.55

 
558,494

 
4,999

 
1.81

Trust preferred borrowings
 
67,011

 
1,443

 
4.34

 
67,011

 
1,194

 
3.59

Senior debt
 
98,437

 
2,359

 
4.79

 
98,220

 
2,359

 
4.80

Other borrowed funds(4)
 
167,547

 
1,671

 
2.01

 
141,478

 
901

 
1.28

Total interest-bearing liabilities
 
6,892,987

 
35,934

 
1.05
%
 
4,724,773

 
21,061

 
0.90
%
Noninterest-bearing demand deposits
 
1,948,594

 
 
 
 
 
1,385,861

 
 
 
 
Other noninterest-bearing liabilities
 
288,703

 
 
 
 
 
83,862

 
 
 
 
Stockholders’ equity
 
1,489,241

 
 
 
 
 
741,652

 
 
 
 
Noncontrolling interest
 
(100
)
 
 
 
 
 

 
 
 
 
Total liabilities and stockholders’ equity
 
$
10,619,425

 
 
 
 
 
$
6,936,148

 
 
 
 
Excess of interest-earning assets over interest-bearing liabilities
 
$
2,347,186

 
 
 
 
 
$
1,210,835

 
 
 
 
Net interest and dividend income
 
 
 
$
206,546

 
 
 
 
 
$
118,703

 
 
Interest rate spread
 
 
 
 
 
4.26
%
 
 
 
 
 
3.87
%
Net interest margin
 
 
 
 
 
4.52
%
 
 
 
 
 
4.06
%
(1) 
Weighted average yields for tax-exempt securities and loans have been computed on a tax-equivalent basis.
(2) 
Average balances are net of unearned income and include nonperforming loans.
(3) 
Includes securities available for sale at fair value.
(4) 
Includes federal funds purchased.

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Three months ended June 30, 2019: During the three months ended June 30, 2019, net interest income increased $62.2 million, or 102% from the three months ended June 30, 2018. Net interest margin was 4.68% for the second quarter of 2019, a 58 basis points increase compared to 4.10% for the second quarter of 2018. This increase includes approximately 29 bps of higher modeled purchase-related accretion, approximately 16 bps from incremental accretion due to pay-offs during the quarter, and 13 bps resulting from the successful balance sheet optimization and improved positioning in the higher short-term interest rate environment over the last year, partially offset by expected margin compression due to Beneficial's lower-margin balance sheet.
Six months ended June 30, 2019: During the six months ended June 30, 2019, net interest income increased $87.8 million, or 74% from the six months ended June 30, 2018. Net interest margin was 4.52% for the first half of 2019, a 46 basis points increase compared to 4.06% for the first half of 2018. This increase includes an 26 bps increase from purchase-related accretion from the acquisition of Beneficial, 14 bps from incremental accretion due to pay-offs during the period and 6 bps due to improved positioning in the higher short-term interest rate environment over the last year and our balance sheet optimization, partially offset by expected margin compression due to Beneficial's lower-margin balance sheet.
Provision/Allowance for Loan Losses
We maintain an allowance for loan losses at an appropriate level based on our assessment of estimable and probable losses in the loan portfolio. Our allowance for loan losses is based on the inherent risk of our loans and various other factors including but not limited to, collateral values, trends in asset quality, level of delinquent loans and concentrations. In addition, regional economic conditions are taken into consideration. Our evaluation is based on a review of the portfolio and requires significant, complex and difficult judgments.
For the three months ended June 30, 2019 and 2018, we recorded a provision for loan losses of $12.2 million and $2.5 million, respectively. For the six months ended June 30, 2019 and 2018, we recorded a provision for loan losses of $19.8 million and $6.1 million, respectively. For the three and six months ended June 30, 2019, provision for loan losses increased $9.7 million and $13.7 million, respectively, from the same periods in 2018, primarily due to two legacy WSFS C&I loans, previously classified as nonperforming, that experienced significant credit events in the second quarter of 2019 resulting in higher levels of provision for loan losses and charge-offs.
The allowance for loan losses was $45.4 million at June 30, 2019 and $39.5 million at December 31, 2018. The ratio of allowance for loan losses to total gross loans was 0.53% at June 30, 2019 and 0.81% at December 31, 2018. Excluding the impact of all purchased loans, this ratio would have been 0.99% and 0.89% at June 30, 2019 and December 31, 2018, respectively. The ratio of net charge-offs to average gross loans net of unearned income, which excludes loans held for sale and reverse mortgages, was 0.38% and 0.29% (annualized) at June 30, 2019 and December 31, 2018, respectively. The ALLL was 121% of nonaccruing loans at June 30, 2019, compared to 113% at June 30, 2018. See Note 8 to the unaudited Consolidated Financial Statements for further information.
Noninterest (Fee) Income
Three months ended June 30, 2019: During the three months ended June 30, 2019, noninterest (fee) income was $42.9 million, an increase of $7.9 million compared to $35.0 million during the three months ended June 30, 2018, primarily due to increases of $3.0 million from credit/debit card and ATM income, primarily from higher bailment revenue from our Cash Connect® division and the impact of the Beneficial acquisition, $1.4 million in deposit service charges, primarily due to our acquisition of Beneficial, $1.2 million in mortgage banking activities, and $1.0 million in the amount of unrealized gain on equity investments for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Six months ended June 30, 2019: For the six months ended June 30, 2019, noninterest (fee) income was $84.0 million, an increase of $1.5 million from $82.5 million for the six months ended June 30, 2018, and includes a decrease of $10.5 million in realized and unrealized gains on our equity investments. Excluding this decrease, noninterest income increased $12.1 million for the six months ended June 30, 2019, primarily due to increases of $4.7 million in credit/debit card and ATM income, reflecting growth due to expanded revenue sources in our Cash Connect® business and the impact of the Beneficial acquisition, $2.4 million in other non-interest income, which includes income related to 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, $1.6 million in deposit service charges, which reflects the impact of our acquisition of Beneficial, and $1.5 million in mortgage banking activities.
For further information, see Note 4 to the unaudited Consolidated Financial Statements.

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Noninterest Expense
Three months ended June 30, 2019: Noninterest expense for the three months ended June 30, 2019 was $107.8 million, an increase of $50.0 million from $57.8 million compared to the three months ended June 30, 2018, and includes an increase of $15.4 million in corporate development and restructuring costs related to our acquisition of Beneficial. Excluding these costs, noninterest expense for the three months ended June 30, 2019 increased $34.6 million compared to the three months ended June 30, 2018, which was primarily due to increases of $17.6 million in salaries, benefits and other compensation, $6.7 million of higher operating costs, and $3.8 million in higher occupancy costs, all supporting growth in our balance sheet and fee-based businesses and reflecting the impact of the Beneficial acquisition.
Six months ended June 30, 2019: Noninterest expense for the six months ended June 30, 2019 was $205.4 million, an increase of $94.2 million from $111.2 million during the six months ended June 30, 2018, and includes an increase of $46.4 million in corporate development and restructuring costs related to our acquisition of Beneficial. Excluding these costs, noninterest expense for the six months ended June 30, 2019 increased $47.8 million, compared with the six months ended June 30, 2018, which was primarily due to increases of $24.0 million in salaries, benefits and other compensation costs, $8.5 million of higher operating costs, $4.9 million in occupancy costs, and $3.2 million of higher equipment costs, all supporting overall franchise growth and reflecting the impact of the Beneficial acquisition.
Income Taxes
We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, Income Taxes, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded income tax expense of $10.1 million and $16.4 million during the three and six months ended June 30, 2019, respectively compared to income tax expense of $6.9 million and $17.7 million for the same periods in 2018.
Our effective tax rate was 21.9% and 25.1% for the three and six months ended June 30, 2019, compared to 19.4% and 21.1% during the same periods in 2018.  The effective tax rate for the six months ended June 30, 2019 increased primarily due to non-deductible expenses associated with the acquisition of Beneficial. Nondeductible acquisition costs of $8.2 million were recognized during the six months ended June 30, 2019 whereas none were incurred in the comparable period in 2018. Further, the tax benefit related to stock-based compensation activity during the six months ended June 30, 2019 pursuant to ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, Compensation - Stock Compensation (Topic 718), decreased compared to the prior year. The tax benefit recognized during the three and six months ended June 30, 2019 were $1.2 million and $1.3 million, respectively, compared to $1.5 million and $2.1 million for the comparable period in 2018.
The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, and excess tax benefits from recognized stock compensation. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options, nondeductible acquisition costs and a provision for state income tax expense.
We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.
Contractual Obligations
Our contractual obligations at June 30, 2019 did not significantly change from our contractual obligations at March 31, 2019, which are disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.



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RECONCILIATION OF NON-GAAP MEASURE TO GAAP MEASURE
The following table provides a reconciliation of tangible common book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure helps management and investors better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.
(Dollars and share amounts in thousands, except per share amounts)
 
June 30, 2019
 
December 31, 2018
Stockholders’ equity
 
$
1,836,611

 
$
820,920

Less: Goodwill and other intangible assets
 
575,696

 
186,023

Tangible common equity (numerator)
 
$
1,260,915

 
$
634,897

Shares of common stock outstanding (denominator)
 
53,232

 
31,374

Book value per share of common stock
 
$
34.50

 
$
26.17

Goodwill and other intangible assets
 
10.81

 
5.93

Tangible book value per share of common stock
 
$
23.69

 
$
20.24

CRITICAL ACCOUNTING ESTIMATES
The preparation of the unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those used to determine the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2019, it is possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.
For further discussion of our critical accounting estimates, see the “Management's Discussion and Analysis - Critical Accounting Estimates” section of our Annual Report on Form 10-K for the year ended December 31, 2018.

RECENT REGULATORY DEVELOPMENTS
General
As a federally chartered savings institution the Bank is subject to regulation by the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), collectively referred to as the Federal banking agencies. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OCC periodically examines the Bank for compliance with regulatory requirements as well as to assess the Bank’s safety and soundness. The FDIC also has the authority to conduct special examinations of the Bank. The Bank is required to file periodic reports with the OCC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the FHFA and the Federal Reserve.
Financial Reform Legislation
The Dodd-Frank Act, which was enacted in 2010, imposed new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies, including insured depository institutions. The law also established the Consumer Financial Protection Bureau (CFPB) as an independent agency within the Federal Reserve. Some of the provisions of the Dodd-Frank Act have increased our expenses, decreased our revenues, and changed the activities in which we engage.

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In May 2018, the Economic Growth Act was signed into law. The Economic Growth Act amends portions of the Dodd-Frank Act in order to provide regulatory relief to banking organizations such as ourselves. Among other reforms, the Economic Growth Act revised the risk-weighting of certain commercial real estate loans. The Basel III Capital Rules as finalized in 2013 required a banking organization to risk weight certain commercial real estate loans that were determined to have high volatility at 150% rather than at 100% for other commercial real estate (CRE) loans. In order to avoid high volatility commercial real estate (HVCRE) status and the higher risk weight, a CRE loan had to meet several requirements, including an equity contribution form the borrower in the form of cash, unencumbered readily marketable assets, or paid development expenses out of pocket. A lender could not return the contribution to the borrower until the loan was paid off or replaced with permanent financing. The Economic Growth Act replaced the HVCRE category with a narrower category for HVCRE acquisition, development, and construction (HVCRE ADC) loans. Among other things, a borrower may now make its equity contribution in the form of real property or improvements, and the lender may reclassify an HVCRE ADC loan more easily, enabling the lender to return the equity contribution to the borrower more easily. The federal banking agencies issued an interim final rule in September 2018 to implement these changes. We have not yet determined the impact of these changes on our CRE loan portfolio.
Several but not all of the reforms are limited to banking organizations with less than $10 billion in total consolidated assets. At June 30, 2019, as a result of our acquisition of Beneficial, our total consolidated assets at both the Company and Bank levels exceeded $10 billion, and we have ceased to be eligible for many of these changes. However, we may take advantage of certain other changes wrought by the Economic Growth Act. Dodd-Frank imposed certain enhanced prudential standards relating to stress testing and risk management on bank holding companies with more than $10 billion in total consolidated assets. The Economic Growth Act presumptively lifts the threshold for these requirements to at least $100 billion, and the Federal Reserve Board has proposed rules to implement these provisions. Accordingly the stress testing and risk management standards do not apply to the Company.
Basel III
In 2013, the Federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision capital guidelines for U.S. banking organizations. Under the final rules as of January 2015, minimum requirements increased for both the quantity and quality of capital maintained by the Company and the Bank. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of total capital to risk-weighted assets of 8.0%, and required a minimum Tier 1 leverage ratio of 4.0%.
In addition, the capital rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer: a ratio of CET 1 to total risk-based assets of at least 2.5% on top of the minimum risk-based capital requirements. The implementation of the capital conservation buffer began to phase in on January 1, 2016, and took effect on January 1, 2019. As a result, as of January 1, 2019, the Company and the Bank must adhere to the following minimum capital ratios to satisfy the Basel III Capital Rule requirements and to avoid the limitations on capital distributions and discretionary bonus payments to executive officers: (i) 4.0% tier 1 leverage ratio; (ii) minimum CET 1 risk-based capital ratio of 7.0%; (iii) minimum tier 1 risk-based capital ratio of 8.5%; and (iv) minimum total risk-based capital ratio of 10.5%. The final rules also revised the standards for an insured depository institution to be “well-capitalized” under the banking agencies’ prompt corrective action framework, requiring a common equity Tier 1 capital ratio of 6.5%, Tier 1 capital ratio of 8.0% and total capital ratio of 8.0%, while leaving unchanged the existing 5.0% leverage ratio requirement. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. Newly issued trust preferred securities and cumulative perpetual preferred stock may no longer be included in Tier 1 capital. However, for depository institution holding companies of less than $15 billion in total consolidated assets, such as the Company, most outstanding trust preferred securities and other non-qualifying securities issued prior to May 19, 2010 are permanently grandfathered to be included in Tier 1 capital (up to a limit of 25% of Tier 1 capital, excluding non-qualifying capital instruments). As of June 30, 2019, we had approximately $67.0 million of trust preferred securities outstanding, all of which are counted as Tier 1 capital.
The phase-in period for the final rules began for us on January 1, 2015. Full compliance with all of the final rule’s requirements phased in over a multi-year schedule was required by January 1, 2019. As of June 30, 2019, the Company and the Bank met the applicable standards, and the Bank was “well-capitalized” under the prompt corrective action rules. The Economic Growth Act created a “community bank leverage ratio” to ease the capital requirements for banks with less than $10 billion in total consolidated assets, after the acquisition of Beneficial, the Bank may not take advantage of this change.
In 2014, the Federal banking agencies adopted a “liquidity coverage ratio” requirement (LCR) for large internationally active banking organizations, and in 2016, the agencies proposed a “net stable funding ratio” standard (NSFR) for the same group of institutions. The LCR measures an organizations’ ability to meet liquidity demands over a 30-day horizon; the NSFR would test the same capacity over a one-year horizon. Neither requirement applies directly to the Company or the Bank, but the policies embedded in them may inform the work of the examiners as they consider our liquidity.

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Debit Card Interchange Fees
The Federal Reserve has issued rules under the Electronic Funds Transfer Act, as amended by a section of the Dodd-Frank Act, known as the Durbin Amendment, to limit interchange fees that an issuer may receive or charge for an electronic debit card transaction. Under the rules, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. In addition, the rules allow for an upward adjustment of no more than one cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the rule.
In accordance with the statute, the interchange fee standards do not apply to fees charged by issuers that, together with their affiliates, have assets of less than $10.0 billion on the annual measurement date (December 31), against debit accounts that they hold. As a result of our acquisition of Beneficial our total consolidated assets at both the Company and Bank levels will exceed $10 billion on December 31, 2019, and we will become subject to the Durbin Amendment rules in 2020.
Transition from London Inter-Bank Offered Rate (LIBOR)
In 2014, a committee of private-market derivative participants and their regulators, the Alternative Reference Rate Committee (ARRC), was convened by the Federal Reserve to identify an alternative reference interest rate to replace LIBOR. In June 2017, the ARRC announced the Secured Overnight Funding Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR. In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. In April 2018, the Federal Reserve Bank of New York began to publish SOFR rates on a daily basis.
Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are indexed to LIBOR. As of June 30, 2019, the Company had approximately $1.4 billion of loans and $748 million of derivatives, including notional value of $25 million of balance sheet swaps and $723 million of customer guarantees, indexed to LIBOR that mature after 2021. In addition, the Company had approximately $167 million of debt securities outstanding that are indexed to LIBOR (either currently or in the future) as of June 30, 2019. The Company had no investment securities, repurchase and resale agreements or FHLB advances indexed to LIBOR as of June 30, 2019. The Company’s financial instruments and products that are indexed to LIBOR are significant, and if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks. 
Due to the uncertainty surrounding the future of LIBOR, it is expected that the transition will span several reporting periods through, and potentially beyond, the end of 2021. A cross-functional team from Finance, Lending, Risk and IT is leading our efforts to monitor this activity and evaluate the related risks and potential process changes arising from the transition from LIBOR. Once the initial assessment efforts are completed, which is anticipated to occur by the end of 2019, the cross-functional team, with assistance from external resources as needed, will lead the transition effort. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, previously filed with the Securities and Exchange Commission.
CFPB
The CFPB is responsible for writing and reviewing the consumer protection regulations that apply to various financial institutions, including insured depository institutions. Responsibility for examinations and enforcement with respect to a bank is divided between the OCC and the CFPB, depending on whether the bank has more or less than $10 billion in total consolidated assets. Prior to our acquisition of Beneficial Bank, the Bank was overseen by the OCC on consumer protection issues; after the acquisition, the Bank is now subject to CFPB examination and enforcement.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk
Incorporated herein by reference from Item 2 Part I (Interest Rate Sensitivity) of this Quarterly Report on Form 10-Q.
Item 4.     Controls and Procedures
 
(a)
Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)
Changes in internal control over financial reporting. During the three months ended June 30, 2019, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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Part II. OTHER INFORMATION
Item 1.    Legal Proceedings
Incorporated herein by reference to Note 20 – Legal and Other Proceedings to the unaudited Consolidated Financial Statements.
Item 1A.    Risk Factors

There have not been any material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, previously filed with the Securities and Exchange Commission.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2019.
During the fourth quarter of 2018, the Board of Directors of the Company approved a stock buyback program that enables us to repurchase up to 3,136,978 shares of common stock after the closing of our acquisition of Beneficial, which occurred on March 1, 2019. Under the program, purchases may be made from time to time in the open market or through negotiated transactions, subject to market conditions and other factors, and in accordance with applicable securities laws. The program is consistent with our intent to return a minimum of 25% of annual net income to stockholders through dividends and share repurchases while maintaining capital ratios in excess of “well-capitalized” regulatory benchmarks.
 
2019
 
Total Number
of Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April
 

 
$

 

 
3,059,526

May
 
138,888

 
41.74

 
138,888

 
2,920,638

June
 
55,000

 
40.53

 
55,000

 
2,865,638

Total
 
193,888

 
$
41.39

 
193,888

 
 






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Item 3.    Defaults upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.
Item 6.     Exhibits
 
Exhibit
Number
  
Description of Document
2.1
 
Agreement and Plan of Reorganization, dated as of August 7, 2018, as amended on November 1, 2018, by and between WSFS Financial Corporation and Beneficial Bancorp, Inc. is incorporated herein by reference to Exhibit 2.01 of the Registrant’s Form S-4/A filed on November 2, 2018. *
3.1
  
Registrant’s Amended and Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K filed for the year ended December 31, 2011.
3.2
  
Certificate of Amendment, dated May 1, 2015, to the Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on May 5, 2015.
3.3
 
Certificate of Amendment, dated April 30, 2019, to the Registrant’s Amended and Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on April 30, 2019.
3.4
  
Amended and Restated Bylaws of WSFS Financial Corporation is incorporated herein by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on November 21, 2014.
31.1
  
31.2
  
32
  
101.INS
  
XBRL Instance Document **
101.SCH
  
XBRL Schema Document **
101.CAL
  
XBRL Calculation Linkbase Document **
101.LAB
  
XBRL Labels Linkbase Document **
101.PRE
  
XBRL Presentation Linkbase Document **
101.DEF
  
XBRL Definition Linkbase Document **
* Schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
** Submitted as Exhibits 101 to this Quarterly Report on Form 10-Q are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
WSFS FINANCIAL CORPORATION
 
 
 
Date: August 7, 2019
 
/s/ Rodger Levenson
 
 
Rodger Levenson
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: August 7, 2019
 
/s/ Dominic C. Canuso
 
 
Dominic C. Canuso
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

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