Beneficial Bancorp 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                to               

Commission file number: 001-36806

BENEFICIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	47-1569198
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

1818 Market Street, Philadelphia, Pennsylvania	19103
(Address of principal executive offices)	(Zip Code)

(215) 864-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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 for such shorter period that the registrant was required to submit such files). Yes x    No o

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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one)

Large Accelerated Filer x	Accelerated Filer o
Non-Accelerated Filer o	Smaller Reporting Company o
	Emerging Growth Company o

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 standards provided pursuant to Section 7(a)(2)(B) of the Securities Act  o

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

As of November 7, 2018, there were 74,801,452 shares of the registrant’s common stock outstanding.

BENEFICIAL BANCORP, INC.

Table of Contents

			Page No.
Part I.	Financial Information
Item 1.		Financial Statements (unaudited)
		Unaudited Condensed Consolidated Statements of Financial Condition as of September 30, 2018 and December 31, 2017	1
		Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 2018 and 2017	2
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the Nine Months ended September 30, 2018 and 2017	3
		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2018	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and 2017	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.		Controls and Procedures	71
Part II.	Other Information
Item 1.		Legal Proceedings	72
Item 1A.		Risk Factors	72
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.		Defaults Upon Senior Securities	73
Item 4.		Mine Safety Disclosures	73
Item 5.		Other Information	73
Item 6.		Exhibits	73
Signatures			74

PART I.   FINANCIAL INFORMATION

Item 1.    Financial Statements

BENEFICIAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Condition

(Dollars in thousands, except share and per share amounts)

	September 30, 2018			December 31, 2017
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks	$	46,919		$	45,048
Overnight investments	796,019			512,567
Total cash and cash equivalents	842,938			557,615
INVESTMENT SECURITIES:
Available-for-sale, at fair value (amortized cost of $291,119 and $309,333 at September 30, 2018 and December 31, 2017, respectively)	287,060			310,308
Held-to-maturity (estimated fair value of $422,620 and $533,425 at September 30, 2018 and December 31, 2017, respectively)	438,649			537,302
Federal Home Loan Bank stock, at cost	23,182			23,210
Total investment securities	748,891			870,820
LOANS AND LEASES:	3,926,381			4,034,130
Allowance for loan and lease losses	(43,137		)	(43,267		)
Net loans and leases	3,883,244			3,990,863
ACCRUED INTEREST RECEIVABLE	18,519			17,512
BANK PREMISES AND EQUIPMENT, Net	68,723			70,573
OTHER ASSETS:
Goodwill	159,671			169,002
Bank owned life insurance	80,793			80,172
Other intangibles	1,428			2,884
Other assets	63,416			39,387
Total other assets	305,308			291,445
TOTAL ASSETS	$	5,867,623		$	5,798,828
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Non-interest bearing deposits	$	552,111		$	563,185
Interest-bearing deposits	3,694,869			3,587,308
Total deposits	4,246,980			4,150,493
Borrowed funds	515,000			540,439
Other liabilities	68,497			73,006
Total liabilities	4,830,477			4,763,938
COMMITMENTS AND CONTINGENCIES (Note 18)
STOCKHOLDERS’ EQUITY:
Preferred Stock - $.01 par value; 100,000,000 shares authorized, None issued or outstanding as of September 30, 2018 and December 31, 2017	—			—
Common Stock - $.01 par value 500,000,000 shares authorized, 84,792,542 and 84,503,580 issued and 74,985,517 and 75,829,537 outstanding, as of September 30, 2018 and December 31, 2017, respectively	848			845
Additional paid-in capital	812,346			799,658
Unearned common stock held by employee savings and stock ownership plan	(25,227		)	(27,078		)
Retained earnings (partially restricted)	413,481			405,497
Accumulated other comprehensive loss	(28,148		)	(26,127		)
Treasury Stock at cost, 9,807,025 shares and 8,674,043 shares at September 30, 2018 and December 31, 2017, respectively	(136,622		)	(118,497		)
Total Beneficial Bancorp Inc. stockholders’ equity	1,036,678			1,034,298
Noncontrolling Interest	468			592
Total Equity	1,037,146			1,034,890
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,867,623		$	5,798,828

See accompanying notes to unaudited condensed consolidated financial statements.

1

BENEFICIAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2018			2017			2018			2017
INTEREST INCOME:
Interest and fees on loans and leases	$	44,990		$	42,969		$	133,458		$	126,667
Interest on overnight investments	3,524			1,239			7,893			2,666
Interest and dividends on investment securities:
Taxable	4,543			5,220			14,531			15,991
Tax-exempt	18			18			54			58
Total interest income	53,075			49,446			155,936			145,382
INTEREST EXPENSE:
Interest on deposits:
Interest bearing checking accounts	708			625			1,995			1,844
Money market and savings deposits	2,227			1,516			5,642			4,467
Time deposits	2,950			2,519			8,230			7,017
Total	5,885			4,660			15,867			13,328
Interest on borrowed funds	2,233			2,400			6,786			7,138
Total interest expense	8,118			7,060			22,653			20,466
Net interest income	44,957			42,386			133,283			124,916
Provision for loan and lease losses	1,916			750			4,581			2,100
Net interest income after provision for loan and lease losses	43,041			41,636			128,702			122,816
NON-INTEREST INCOME:
Insurance and advisory commission and fee income	1,356			1,798			4,681			5,516
Service charges and other income	4,942			4,891			14,369			14,342
Mortgage banking and SBA income	309			424			1,480			1,748
Net gain on sale of insurance agency	3,297			—			3,297			—
Net (loss) gain on investment securities	(23		)	(1		)	100			(7		)
Total non-interest income	9,881			7,112			23,927			21,599
NON-INTEREST EXPENSE:
Salaries and employee benefits	19,482			18,285			59,187			55,670
Occupancy expense	2,520			2,474			8,040			7,746
Depreciation, amortization and maintenance	2,300			2,368			6,877			7,183
Marketing expense	1,478			1,018			4,872			3,160
Intangible amortization expense	199			212			597			1,350
FDIC Insurance	416			441			1,258			1,312
Merger charges	2,261			—			2,261			—
Professional fees	1,130			1,026			3,367			3,237
Classified loan and other real estate owned related expense	356			420			944			950
Other	6,243			7,594			20,625			22,810
Total non-interest expense	36,385			33,838			108,028			103,418
Income before income taxes	16,537			14,910			44,601			40,997
Income tax expense	4,286			5,482			10,782			13,729
CONSOLIDATED NET INCOME	$	12,251		$	9,428		$	33,819		$	27,268
Less: Net loss attributable to noncontrolling interest	(139		)	—			(299		)	—
NET INCOME ATTRIBUTABLE TO BENEFICIAL BANCORP, INC.	$	12,390		$	9,428		$	34,118		$	27,268
EARNINGS PER SHARE — Basic*	$	0.17		$	0.13		$	0.47		$	0.37
EARNINGS PER SHARE — Diluted*	$	0.17		$	0.13		$	0.47		$	0.37
DIVIDENDS DECLARED PER SHARE	$	0.06		$	0.06		$	0.43		$	0.18
Average common shares outstanding — Basic	71,012,206			70,781,924			70,846,044			70,487,219
Average common shares outstanding — Diluted	71,638,486			71,294,232			71,472,868			71,093,015

*Net earnings per share for both common shares and participating securities.

See accompanying notes to the unaudited condensed consolidated financial statements.

2

BENEFICIAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

	For the Nine Months Ended
	September 30,
	2018			2017
Consolidated net income	$	33,819		$	27,268
Less: Net loss attributable to noncontrolling interest	(299		)	—
Net Income attributable to Beneficial Bancorp, Inc.	$	34,118		$	27,268
Other comprehensive income, net of tax:
Securities available for sale and transferred securities:
Unrealized holding (losses) gains on available for sale securities arising during the period (net of tax of $1,135 and $447 for the nine months ended September 30, 2018 and 2017, respectively)	(3,641		)	783
Accretion of unrealized losses on available-for-sale securities transferred to held-to-maturity (net of tax of $212 and $216 for the nine months ended September 30, 2018 and 2017, respectively)	726			378
Reclassification adjustment for net (gains) losses on available for sale securities included in net income (net of tax of $23 and $3 for the nine months ended September 30, 2018 and 2017, respectively)	(77		)	4
Cash flow hedge:
Unrealized gain on cash flow hedge arising during the period (net of tax of $1,528 for the nine months ended September 30, 2018)	5,247			—
Defined benefit pension plans:
Pension gains, other postretirement and postemployment benefit plan adjustments (net of tax of $370 and $644 for the nine months ended September 30, 2018 and 2017, respectively)	955			891
Total other comprehensive income	3,210			2,056
Comprehensive income	$	37,328		$	29,324

See accompanying notes to the unaudited condensed consolidated financial statements.

3

BENEFICIAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)

	Number of Shares Issued	Common Stock		Additional Paid in Capital			Common Stock held by KSOP			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Beneficial Bancorp Inc. Stockholders’ Equity			Noncontrolling Interest			Total Stockholders’ Equity
BALANCE, JANUARY 1, 2018	84,503,580	$	845	$	799,658		$	(27,078	)	$	405,497		$	(118,497	)	$	(26,127	)	$	1,034,298		$	592		$	1,034,890
Net Income (Loss)										34,118									34,118			(299		)	33,819
Contribution from noncontrolling shareholders																			—			175			175
Dividends declared ($0.43 per share)										(31,365		)							(31,365		)				(31,365		)
KSOP shares committed to be released				1,405			1,851												3,256						3,256
Stock option expense				443															443						443
Restricted stock expense				9,958															9,958						9,958
Effect of adoption of ASU 2016-01 accounting for equity securities										159						(159		)	—						—
Stock options exercised	288,962	3		3,017															3,020						3,020
Purchase of treasury stock including shares withheld to cover tax liabilities													(20,260		)				(20,260		)				(20,260		)
Omnibus Equity Plan shares granted from treasury stock, net				(2,135		)							2,135						—						—
Reclassification due to the adoption of ASU No. 2018-02										5,072						(5,072		)	—						—
Net unrealized losses on AFS securities arising during the period (net of tax of $1,135)																(3,641		)	(3,641		)				(3,641		)
Accretion of unrealized losses on AFS securities transferred to HTM during the period (net of tax of $212)																726			726						726
Reclassification adjustment for net gains on AFS securities included in net income (net of tax of $23)																(77		)	(77		)				(77		)
Unrealized gain on cash flow hedge arising during the period (net of tax of $1,528)																5,247			5,247						5,247
Pension, other postretirement and postemployment benefit plan adjustments (net of tax of $370)																955			955						955
BALANCE, SEPTEMBER 30, 2018	84,792,542	$	848	$	812,346		$	(25,227	)	$	413,481		$	(136,622	)	$	(28,148	)	$	1,036,678		$	468		$	1,037,146

See accompanying notes to the unaudited condensed consolidated financial statements.

4

BENEFICIAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

	For the Nine Months ended September 30,
	2018			2017
OPERATING ACTIVITIES:
Net income attributable to Beneficial Bancorp, Inc.	$	34,118		$	27,268
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan and lease losses	4,581			2,100
Depreciation and amortization	4,290			4,628
Intangible amortization	597			1,350
Net gain on sale of insurance agency	(3,297		)	—
Net (gain) loss on investment securities	(100		)	7
Accretion of discount on investments	(100		)	(155		)
Amortization of premium on investments	2,148			3,055
Accretion of acquired loan and lease marks	(2,081		)	(1,461		)
Gain on sale of loans	(1,311		)	(1,622		)
Net (gain) loss from disposition of premises and equipment	(35		)	90
Net gain on sale of other real estate	(88		)	—
Other real estate impairment	—			146
Amortization of KSOP	3,256			3,148
(Increase) decrease in bank owned life insurance	(621		)	688
Stock based compensation	10,401			10,761
Origination of loans held for sale	(7,690		)	(12,851		)
Proceeds from sale of loans	27,676			30,808
Changes in assets and liabilities:
Accrued interest receivable	(1,007		)	(248		)
Accrued interest payable	(27		)	146
Income taxes payable	2,150			1,229
Other liabilities	(4,586		)	(8,186		)
Other assets	(2,167		)	(258		)
Net cash provided by operating activities	66,107			60,643
INVESTING ACTIVITIES:
Loans and leases originated or acquired	(878,766		)	(902,908		)
Principal repayment on loans and leases	964,982			863,893
Proceeds from sale of investment securities available for sale	511			—
Proceeds from maturities, calls or repayments of investment securities available for sale	47,880			68,054
Purchases of investment securities held to maturity	(500		)	(40,031		)
Proceeds from maturities, calls or repayments of investment securities held to maturity	98,765			82,722
Net (purchases) sales of money market and mutual funds	(30,643		)	14,634
Net redemptions (purchases) of Federal Home Loan Bank stock	28			(1,979		)
Purchase of equity method investment	(3,000		)	—
Proceeds from sale of other real estate owned	231			861
Purchases of premises and equipment	(2,639		)	(1,020		)
Proceeds from sale of premises and equipment	118			—
Cash (used in) provided by other investing activities	(70		)	1,009
Net cash provided by investing activities	196,897			85,235
FINANCING ACTIVITIES:
Increase in borrowed funds	30,000			135,000
Repayment of borrowed funds	(55,439		)	(84,987		)
Net increase in checking, savings and demand accounts	137,010			8,094
Net (decrease) increase in time deposits	(40,523		)	4,636
Cash dividend paid to stockholders	(31,365		)	(13,178		)
Change in noncontrolling interest	(124		)	—
Proceeds from the exercise of stock options	3,222			11,942
Cash paid to tax authorities related to stock based compensation awards	(5,904		)	(7,065		)
Purchase of treasury stock	(14,558		)	(10,350		)
Net cash provided by financing activities	22,319			44,092
NET INCREASE IN CASH AND CASH EQUIVALENTS	285,323			189,970
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	557,615			287,046
CASH AND CASH EQUIVALENTS, END OF PERIOD	842,938			$	477,016
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NON-CASH INFORMATION:
Cash payments for interest	$	22,680		$	20,319
Cash payments for income taxes	8,632			12,499
Transfers of loans to other real estate owned	191			124

See accompanying notes to the unaudited condensed consolidated financial statements.

5

BENEFICIAL BANCORP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — PENDING MERGER WITH WSFS FINANCIAL CORPORATION

On August 8, 2018, WSFS Financial Corporation (“WSFS”) and the Company issued a joint press release announcing that WSFS and the Company have entered into an Agreement and Plan of Reorganization pursuant to which the Company will merge with and into WSFS, with WSFS as the surviving entity.  Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, stockholders of Beneficial will receive 0.3013 shares of WSFS common stock and $2.93 in cash for each share of Beneficial common stock.  The transaction is subject to customary closing conditions and is expected to close during the first quarter of 2019.

Net income for the three and nine months ended September 30, 2018 includes $2.3 million of professional fees associated with the pending merger of Beneficial with WSFS.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by Beneficial Bancorp, Inc. (the “Company” or “Beneficial”) with the U.S. Securities and Exchange Commission on February 28, 2018.  The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018 or any other period.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  Specifically, the financial statements include the accounts of Beneficial Bank (the “Bank”), the Company’s wholly owned subsidiary, and the Bank’s wholly and majority owned subsidiaries. The Bank’s wholly and majority owned subsidiaries include: (i) Neumann Finance Company, a majority owned subsidiary, formed to originate small business leases, (ii) Neumann Corporation, a Delaware corporation and (iii) Beneficial Equipment Finance Corporation (formerly BSB Union Corporation), an equipment leasing company. Additionally, the Bank has subsidiaries that hold other real estate acquired in foreclosure or transferred from the Bank’s real estate loan portfolio. All significant intercompany accounts and transactions have been eliminated.  The various services and products support each other and are interrelated.  During the quarter ended September 30, 2018, the Company entered into an asset purchase agreement with a third party to sell the net assets of Beneficial Insurance Services, LLC, a former wholly owned subsidiary of the Bank, and exit that business.  In connection with that sale, Beneficial received net proceeds of $14.1 million on October 1, 2018 and realized a net gain of $3.3 million as the sale proceeds exceeded our carrying amount for Beneficial Insurance Services including goodwill and intangible assets during the three months ended September 30, 2018.  Goodwill and intangible assets that related to Beneficial Insurance Services decreased $10.2 million during the quarter ended September 30, 2018 as a result of the sale.

Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the various financial services and products offered are included in one reportable operating segment: community banking as outlined under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC” or “codification”) Topic 280 for Segment Reporting.

Use of Estimates in the Preparation of Financial Statements

These unaudited interim condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to

6

make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates include the allowance for loan losses, goodwill, other intangible assets, income taxes, postretirement benefits, and the fair value of investment securities.  Actual results could differ from those estimates and assumptions.

NOTE 3 — NATURE OF OPERATIONS

The Company is a Maryland corporation that was incorporated in August 2014 to be the successor to Beneficial Mutual Bancorp, Inc. (“Beneficial Mutual Bancorp”), the Bank’s former mid-tier stock holding company, upon completion of the second-step conversion of the Bank from the mutual holding company structure to the stock holding company structure. Beneficial Savings Bank MHC was the former mutual holding company for Beneficial Mutual Bancorp prior to completion of the second-step conversion. Upon the completion of the second-step conversion, each of Beneficial Savings Bank MHC and Beneficial Mutual Bancorp ceased to exist. The second-step conversion was completed on January 12, 2015, at which time the Company sold, for gross proceeds of $503.8 million, a total of 50,383,817 shares of common stock at $10.00 per share, including 2,015,352 shares purchased by the Bank’s employee savings and stock ownership plan. As part of the second-step conversion, each of the existing 29,394,417 outstanding shares of Beneficial Mutual Bancorp common stock owned by persons other than Beneficial Savings Bank MHC was converted into 1.0999 of a share of Company common stock.

The consolidated financial statements include the accounts of the Company, the Bank, a Pennsylvania chartered savings bank, and the Bank’s subsidiaries. The Company owns 100% of the issued and outstanding common stock of the Bank. The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 61 offices throughout the Philadelphia and Southern New Jersey area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the “FDIC”). The Company is regulated by the Board of Governors of the Federal Reserve System. The deposits of the Bank are insured up to the applicable legal limits by the Deposit Insurance Fund of the FDIC.

On August 8, 2018, the Company and WSFS issued a press release announcing the proposed merger of the Company with and into WSFS.  See “Note 1 — Pending Merger with WSFS Financial Corporation” for additional information.

NOTE 4 — NON-INTEREST INCOME

During the nine months ended September 30, 2018, the Company adopted ASU 2014-09 - Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606.   The Company has included the following table regarding the Company’s non-interest income for the periods presented.

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Insurance commission income	$	1,356		$	1,798		$	4,681		$	5,516
Debit card interchange fee income	2,059			1,911			6,213			5,724
Returned check charges	1,016			1,078			2,983			2,972
Bank owned life insurance	726			589			2,286			2,483
Limited partnership losses and amortization	(44		)	88			(720		)	(493		)
Other service charges	1,185			1,225			3,607			3,656
Mortgage banking & SBA income	309			424			1,480			1,748
Net (loss) gain on investment securities	(23		)	(1		)	100			(7		)
Net gain on sale of insurance agency	3,297			—			3,297			—
Total non-interest income	$	9,881		$	7,112		$	23,927		$	21,599

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09.  The following is a discussion of key revenues within the scope of the new revenue guidance:

7

·Insurance commission income — Insurance revenue is earned through commissions on insurance sales and earned at a point in time.

·Debit card interchange fee income — Card processing fees consist of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card network.  Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

·Service charges on deposit accounts — Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services; as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees. These revenues are included in returned check charges and other service charges in the table above.

NOTE 5 — CHANGES IN AND RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in the balances of each component of accumulated other comprehensive income (“AOCI”) for the nine months ended September 30, 2018 and September 30, 2017.  All amounts are presented net of tax.

(Dollars in thousands)	Net unrealized holding losses on available- for-sale securities			Net unrealized gains on equity securities			Defined benefit pension plan items			Cash Flow Hedge		Total
Beginning balance, January 1, 2018	$	(826	)	$	—		$	(25,888	)	$	587	$	(26,127	)
Changes in other comprehensive loss before reclassifications:
Unrealized holding losses on AFS securities	(3,641		)	—			—			—		(3,641		)
Accretion of unrealized losses on AFS securities transferred to HTM	726			—			—			—		726
Unrealized gain on cash flow hedge	—			—			—			5,247		5,247
Amount reclassified from accumulated other comprehensive loss	(77		)	—			955			—		878
Total changes in current-period other comprehensive loss before reclassifications	(2,992		)	—			955			5,247		3,210
Changes in other comprehensive loss as a result of reclassifications:
Effect of adoption of ASU 2016-01 equity securities	—			(159		)	—			—		(159		)
Reclassification due to the adoption of ASU No. 2018-02	(199		)	—			(4,999		)	126		(5,072		)
Total changes in other comprehensive loss as a result of reclassifications	(199		)	(159		)	(4,999		)	126		(5,231		)
Net other comprehensive (loss) income	(3,191		)	(159		)	(4,044		)	5,373		(2,021		)
Ending balance, September 30, 2018	$	(4,017	)	$	(159	)	$	(29,932	)	$	5,960	$	(28,148	)

	Net unrealized
	holding gains on
	available-for-sale			Defined benefit
(Dollars in thousands)	securities			pension plan items			Total
Beginning balance, January 1, 2017	$	(747	)	$	(25,086	)	$	(25,833	)
Changes in other comprehensive loss before reclassifications:
Unrealized holding gains on AFS securities	783			—			783
Accretion of unrealized losses on AFS securities transferred to HTM	378			—			378
Amount reclassified from accumulated other comprehensive loss	4			891			895
Net current-period other comprehensive income	1,165			891			2,056
Ending balance, September 30, 2017	$	418		$	(24,195	)	$	(23,777	)

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The following tables present reclassifications out of AOCI by component for the nine months ended September 30, 2018 and September 30, 2017:

For the Nine Months Ended September 30, 2018

(Dollars in thousands)

Details about accumulated	Amount reclassified			Affected line item in
other comprehensive loss	from accumulated other			the consolidated statements
Components	comprehensive loss			of operations
Unrealized gains and losses on available-for-sale securities
	$	(100	)	Net gain on sale of investment securities
	23			Income tax expense
	$	(77	)	Net of tax
Amortization of defined benefit pension items
Prior service costs	$	(364	)(1)	Other non-interest expense
Net recognized actuarial losses	1,689		(1)	Other non-interest expense
	$	1,325		Total before tax
	(370		)	Income tax benefit
	$	955		Net of tax

(1)These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost.  See Note 16 - Pension and Other Postretirement Benefits for additional details.

For the Nine Months Ended September 30, 2017

(Dollars in thousands)

Details about accumulated	Amount reclassified			Affected line item in
other comprehensive loss	from accumulated other			the consolidated statements
Components	comprehensive loss			of operations
Unrealized gains and losses on available-for-sale securities
	$	7		Net loss on sale of investment securities
	(3		)	Income tax benefit
	$	4		Net of tax
Amortization of defined benefit pension items
Prior service costs	$	(364	)(1)	Other non-interest expense
Net recognized actuarial losses	1,899		(1)	Other non-interest expense
	1,535			Total before tax
	(644		)	Income tax benefit
	$	891		Net of tax

(1)These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost.  See Note 16 - Pension and Other Postretirement Benefits for additional details.

NOTE 6 — EARNINGS PER SHARE

The following table presents a calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017. Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding. The difference between common shares issued and basic average common shares outstanding, for purposes of calculating basic earnings per share, is a result of subtracting unallocated employee savings and stock ownership plan (“KSOP”) shares and unvested restricted stock shares. Since the Company paid dividends during the nine months ended September 30, 2018 and 2017, the Company was required to use the two-class

9

method for both periods to calculate earnings per share as the unvested restricted stock issued under the Company’s equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share is computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period. Net earnings per share for both common shares and participating securities was the same for the three and nine months ended September 30, 2018 and 2017. See Note 17 for further discussion of stock grants.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2018			2017			2018			2017
Basic and diluted earnings per share:
Net income	$	12,390		$	9,428		$	34,118		$	27,268
Net income allocated to unvested restricted stock	(214		)	(273		)	(855		)	(986		)
Net income allocated to common shares	$	12,176		$	9,155		$	33,263		$	26,282
Basic average common shares outstanding	71,012,206			70,781,924			70,846,044			70,487,219
Effect of dilutive securities	626,280			512,308			626,824			605,796
Dilutive average shares outstanding	71,638,486			71,294,232			71,472,868			71,093,015
Net earnings per share
Basic	$	0.17		$	0.13		$	0.47		$	0.37
Diluted	$	0.17		$	0.13		$	0.47		$	0.37

Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the weighted average market value for the periods presented. There were no stock options that were anti-dilutive for both the three and nine months ended September 30, 2018 and 2017.

NOTE 7 — INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at September 30, 2018 and December 31, 2017 are as follows:

	September 30, 2018
	Investment Securities Available-for-Sale
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Equity securities	$	—	$	—	$	—	$	—
U.S. Government Sponsored Enterprise (“GSE”) and Agency notes	2,961		—		88		2,873
Ginnie Mae guaranteed mortgage certificates	2,413		75		—		2,488
GSE mortgage-backed securities	203,337		1,257		4,992		199,602
GSE collateralized mortgage obligations	9,971		14		168		9,817
Municipal bonds	1,809		38		—		1,847
Corporate securities	23,490		10		202		23,298
Money market and mutual funds	47,138		—		3		47,135
Total	$	291,119	$	1,394	$	5,453	$	287,060

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	September 30, 2018
	Investment Securities Held-to-Maturity
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
GSE mortgage-backed securities	$	383,007	$	75	$	13,928	$	369,154
GSE & Agency collateralized mortgage obligations	53,262		—		2,189		51,073
Municipal bonds	380		16		—		396
Foreign bonds	2,000		—		3		1,997
Total	$	438,649	$	91	$	16,120	$	422,620

	December 31, 2017
	Investment Securities Available-for-Sale
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Equity securities	$	250	$	160	$	—	$	410
U.S. Government Sponsored Enterprise (“GSE”) and Agency notes	3,488		—		35		3,453
Ginnie Mae guaranteed mortgage certificates	2,980		108		—		3,088
GSE mortgage-backed securities	245,926		2,378		2,164		246,140
Collateralized mortgage obligations	14,910		17		153		14,774
Municipal bonds	1,792		74		—		1,866
Corporate securities	23,489		594		—		24,083
Money market and mutual funds	16,498		—		4		16,494
Total	$	309,333	$	3,331	$	2,356	$	310,308

	December 31, 2017
	Investment Securities Held-to-Maturity
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
GSE mortgage-backed securities	$	472,259	$	677	$	3,668	$	469,268
Collateralized mortgage obligations	63,038		—		942		62,096
Municipal bonds	505		32		—		537
Foreign bonds	1,500		24		—		1,524
Total	$	537,302	$	733	$	4,610	$	533,425

During the nine months ended September 30, 2018, the Bank sold $190 thousand of mutual funds that resulted in a loss of $2 thousand.  During the nine months ended September 30, 2018, the Bank sold $511 thousand of equity securities and recognized a gain of $102 thousand.

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The following tables provide information on the gross unrealized losses and fair market value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017:

	At September 30, 2018
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Government Sponsored Enterprise (“GSE”) and Agency notes	$	—	$	—	$	2,873	$	88	$	2,873	$	88
Mortgage-backed securities	217,796		5,272		322,023		13,648		539,819		18,920
Corporate securities	18,298		202		—		—		18,298		202
Collateralized mortgage obligations	13,910		480		46,216		1,877		60,126		2,357
Foreign Bond	1,496		3		—		—		1,496		3
Subtotal, debt securities	$	251,500	$	5,957	$	371,112	$	15,613	$	622,612	$	21,570
Mutual funds	—		—		221		3		221		3
Total	$	251,500	$	5,957	$	371,333	$	15,616	$	622,833	$	21,573

	At December 31, 2017
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes	$	3,453	$	35	$	—	$	—	$	3,453	$	35
Mortgage-backed securities	378,645		2,488		175,947		3,344		554,592		5,832
Collateralized mortgage obligations	55,928		770		20,065		325		75,993		1,095
Subtotal, debt securities	$	438,026	$	3,293	$	196,012	$	3,669	$	634,038	$	6,962
Mutual funds	408		4		—		—		408		4
Total	$	438,434	$	3,297	$	196,012	$	3,669	$	634,446	$	6,966

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis or as economic or market concerns warrant such evaluation. The Company determines whether the unrealized losses are temporary in accordance with guidance under FASB ASC Topic 320 for Investments - Debt and Equity Securities. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities.  Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer. The likelihood of recovering the Company’s investment, whether the Company has the intent to sell the investment or that it is more likely than not that the Company will be required to sell the investment before recovery is also used to determine the nature of the decline in market value of the securities.

The Company records the credit portion of OTTI through earnings based on the credit impairment estimates generally derived from cash flow analyses. The remaining unrealized loss, due to factors other than credit, is recorded in other comprehensive income (“OCI”).  The Company had an unrealized loss of $18.9 million related to its GSE mortgage-backed securities as of September 30, 2018.  Additionally, the Company had an unrealized loss of $2.4 million on GSE & Agency collateralized mortgage obligations, an unrealized loss of $88 thousand on GSE Notes, an unrealized loss of $202 thousand on corporate securities, an unrealized loss of $3 thousand on foreign bonds and an unrealized loss of $3 thousand on mutual funds as of September 30, 2018.

U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes

The Company’s investments that were in a loss position for greater than 12 months included GSE Notes with an unrealized loss of 3.0% as of September 30, 2018. The unrealized loss is due to current interest rate levels

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relative to the Company’s cost. Because the unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell these investments before recovery of its amortized cost, which may be at maturity, the Company does not consider these investments to be other-than temporarily impaired at September 30, 2018.

Mortgage-Backed Securities

The Company’s investments that were in a loss position for greater than 12 months included GSE mortgage-backed securities with an unrealized loss of 4.1% as of September 30, 2018.  The Company’s investments that were in a loss position for less than 12 months included GSE mortgage-backed securities with an unrealized loss of 2.4% as of September 30, 2018. The unrealized loss is due to current interest rate levels relative to the Company’s cost. Because the unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell these investments before recovery of its amortized cost, which may be at maturity, the Company does not consider these investments to be other-than temporarily impaired at September 30, 2018.

Collateralized Mortgage Obligations (CMOs)

The Company’s investments that were in a loss position for greater than 12 months included GSE & Agency CMOs with an unrealized loss of 3.9% as of September 30, 2018.  The Company’s investment that was in a loss position for less than 12 months included one Agency CMO with an unrealized loss of 3.3%.  The unrealized loss is due to current interest rate levels relative to the Company’s cost. Because the unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell these investments before recovery of its amortized cost, which may be at maturity, the Company does not consider these investments to be other-than temporarily impaired at September 30, 2018.

Corporate Securities

The Company’s investments that were in a loss position for less than 12 months included Corporate Securities with an unrealized loss of 1.1% as of September 30, 2018. The unrealized loss is due to current interest rate levels relative to the Company’s cost. Because the unrealized loss is due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell this investment before recovery of its amortized cost, which may be at maturity, the Company does not consider this investment to be other-than temporarily impaired at September 30, 2018.

Foreign Bonds

The Company’s investment that was in a loss position for less than 12 months included one Foreign Bond with an unrealized loss of 0.2% as of September 30, 2018. The unrealized loss is due to current interest rate levels relative to the Company’s cost. Because the unrealized loss is due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell this investment before recovery of its amortized cost, which may be at maturity, the Company does not consider this investment to be other-than temporarily impaired at September 30, 2018.

13

The following table sets forth the stated maturities of the investment securities at September 30, 2018 and December 31, 2017. Maturities for mortgage-backed securities are dependent upon the rate environment and prepayments of the underlying loans.  For purposes of this table they are presented separately.

	September 30, 2018				December 31, 2017
	Amortized		Estimated		Amortized		Estimated
(Dollars are in thousands)	Cost		Fair Value		Cost		Fair Value
Available-for-sale:
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	4,770		4,720		5,280		5,319
Due after five years through ten years	23,490		23,298		23,489		24,083
Due after ten years	—		—		—		—
Mortgage-backed securities	215,721		211,907		263,816		264,002
Equity securities	—		—		250		410
Money market and mutual funds	47,138		47,135		16,498		16,494
Total	$	291,119	$	287,060	$	309,333	$	310,308
Held-to-maturity:
Due in one year or less	$	125	$	128	$	125	$	127
Due after one year through five years	2,255		2,265		1,880		1,934
Due after five years through ten years	—		—		—		—
Due after ten years	—		—		—		—
Mortgage-backed securities	436,269		420,227		535,297		531,364
Total	$	438,649	$	422,620	$	537,302	$	533,425

At September 30, 2018 and December 31, 2017, $82.7 million and $78.1 million, respectively, of securities were pledged to secure municipal deposits.

NOTE 8 — LOANS

Loans at September 30, 2018 and December 31, 2017 are summarized as follows:

	September 30, 2018
(Dollars in thousands)	Originated			Acquired Non- Credit Impaired		Acquired Credit Impaired		Total
Commercial:
Commercial real estate	$	1,450,590		$	106,153	$	868	$	1,557,611
Commercial business loans	562,988			80,567		450		644,005
Commercial small business leases	107,231			28,143		—		135,374
Commercial construction	145,776			—		—		145,776
Total commercial loans	2,266,585			214,863		1,318		2,482,766
Residential:
Residential real estate	939,811			41,159		97		981,067
Total residential loans	939,811			41,159		97		981,067
Consumer loans:
Home equity & lines of credit	188,906			16,866		205		205,977
Personal	8,450			5,775		45		14,270
Education	133,877			—		—		133,877
Automobile	108,424			—		—		108,424
Total consumer loans	439,657			22,641		250		462,548
Total loans	3,646,053			278,663		1,665		3,926,381
Allowance for losses	(43,137		)	—		—		(43,137		)
Loans, net	$	3,602,916		$	278,663	$	1,665	$	3,883,244

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	December 31, 2017
(Dollars in thousands)	Originated			Acquired Non- Credit Impaired		Acquired Credit Impaired		Total
Commercial:
Commercial real estate	$	1,448,226		$	128,659	$	5,037	$	1,581,922
Commercial business loans	568,241			100,613		1,235		670,089
Commercial small business leases	92,632			48,622		—		141,254
Commercial construction	146,633			—		—		146,633
Total commercial loans	2,255,732			277,894		6,272		2,539,898
Residential:
Residential real estate	897,052			46,414		107		943,573
Total residential loans	897,052			46,414		107		943,573
Consumer loans:
Home equity & lines of credit	208,191			19,712		206		228,109
Personal	10,978			6,237		56		17,271
Education	147,582			—		—		147,582
Automobile	157,697			—		—		157,697
Total consumer loans	524,448			25,949		262		550,659
Total loans	3,677,232			350,257		6,641		4,034,130
Allowance for losses	(43,267		)	—		—		(43,267		)
Loans, net	$	3,633,965		$	350,257	$	6,641	$	3,990,863

During the three and nine months ended September 30, 2018, the Company recorded a $210 thousand and $1.0 million net gain on the sale of $6.8 million and $18.9 million, respectively, of guaranteed Small Business Administration (“SBA”) loans that is included in “mortgage banking and SBA income” on the consolidated statements of income.  As of September 30, 2018, the Bank retained the $5.6 million outstanding unguaranteed portion of the loans and the related servicing rights for the loans and receives a 1.0% servicing fee from the purchaser of the loans.

As of September 30, 2018, the Company had $473 thousand residential loans held for sale compared to $245 thousand of residential loans held for sale at December 31, 2017. These loans are carried at the lower of cost or estimated fair value, on an aggregate basis. Loans held for sale are loans originated by the Bank to be sold to a third party who is under contractual obligation to purchase the loans from the Bank.

During the three and nine months ended September 30, 2018, the Bank sold residential mortgage loans with an unpaid principal balance of approximately $2.6 million and $7.5 million, respectively, and recorded mortgage banking income of approximately $99 thousand and $439 thousand, respectively.  During the three and nine months ended September 30, 2017, the Bank sold residential mortgage loans with an unpaid principal balance of approximately $3.6 million and $14.4 million, respectively, and recorded mortgage banking income of approximately $176 thousand and $562 thousand, respectively.  The Bank retained the related servicing rights for the loans that were sold to Fannie Mae and receives a 25 basis point servicing fee from the purchaser of the loans. Please refer to Note 21 — Servicing Rights for additional information.

Commercial loans include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks.  Included in the shared national credit portfolio are purchased participations and assignments in leveraged lending transactions. Leveraged lending transactions are generally used to support a merger- or acquisition-related transaction, to back a recapitalization of a company’s balance sheet or to refinance debt.  When considering a participation in the leveraged lending market, the Company will participate only in first lien senior secured term loans that are highly rated (investment grade) by the rating agencies and that trade in active secondary markets.  The Company actively monitors the secondary market for these types of loans to ensure that it maintains flexibility to sell such loans in the event of deteriorating credit quality.  To further minimize risk and based on our current capital levels and loan portfolio, the Company has limited the total amount of leveraged loans to $150.0 million with no single obligor exceeding $15.0 million while maintaining single industry concentrations below 30% of the leveraged lending limit. The Company may reevaluate these limits in future periods.

The shared national credit loans are typically variable rate with terms ranging from one to seven years.  At September 30, 2018, shared national credits totaled $163.8 million, which included $100.3 million of leveraged

15

lending transactions.  All shared national credits were classified as pass rated as of September 30, 2018 as all payments are current and the loans are performing in accordance with their contractual terms.  During the three months ended September 30, 2018, a $7.6 million non-performing shared national credit was sold. Management had established a $1.5 million specific valuation allowance to cover risk associated with this loan as of June 30, 2018 and December 31, 2017.  The actual loss for the loan was $766 thousand.  All other shared national credits were classified as pass rated as of December 31, 2017 as all payments are current and the loans are performing in accordance with their contractual terms.

The Company’s accounting policies for shared national credits, including our charge off and reserve policy, are consistent with the significant accounting policies disclosed in our financial statements for our total loan portfolio.  The Company underwrites all shared national credits consistent with our underwriting guidelines. All shared national credits are subject to annual reviews where the risk rating of the loan is evaluated.  Additionally, the Company obtains quarterly financial information and performs a financial analysis on a regular basis to ensure that the borrower can comply with the financial terms of the loan.  The information used in the analysis is provided by the borrower through the agent bank.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  The Company evaluates the appropriateness of the allowance for loan losses balance on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings and, when less allowances are necessary, a credit is taken. As of September 30, 2018, the Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of (1) a specific valuation allowance on identified problem loans and (2) a general valuation allowance on the remainder of the loan portfolio.  The appropriate allowance level is estimated based upon factors and trends identified by the Company at the time the consolidated financial statements are prepared. Management continuously evaluates its allowance methodology.

The Company charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due, except government guaranteed student loans, and all loans rated substandard or worse that are 90 days past due.  The Company did not maintain a specific valuation allowance as of September 30, 2018.  As of December 31, 2017, the Company maintained a $1.5 million specific valuation allowance for the previously mentioned shared national credit.

The summary activity in the allowance for loan losses for all portfolios for the nine months ended September 30, 2018 and 2017, and for the year ended December 31, 2017, is as follows:

	Nine Months Ended						Year Ended
	September 30,						December 31,
(Dollars in thousands)	2018			2017			2017
Balance, beginning of year	$	43,267		$	43,261		$	43,261
Provision for loan losses	4,581			2,100			3,118
Charge-offs	(5,947		)	(3,873		)	(5,476		)
Recoveries	1,236			1,782			2,364
Balance, end of period	$	43,137		$	43,270		$	43,267

16

The following tables set forth the activity in the allowance for loan losses by portfolio for the nine months ended September 30, 2018 and the year ended December 31, 2017:

	COMMERCIAL									RESIDENTIAL		CONSUMER
September 30, 2018 (Dollars in thousands)	Real Estate			Business			Small Business Leases			Construction		Real Estate			Home Equity & Equity Lines			Personal			Education			Auto			Total
Allowance for loan losses:
Beginning balance	$	28,205		$	10,519		$	961		$	963	$	838		$	491		$	255		$	121		$	914		$	43,267
Charge-offs	(399		)	(1,665		)	(1,148		)	—		(709		)	(414		)	(261		)	(142		)	(1,209		)	(5,947		)
Recoveries	55			110			311			59		4			95			107			—			495			1,236
Provision (credit)	314			882			1,274			310		800			265			76			147			513			4,581
Allowance ending balance	$	28,175		$	9,846		$	1,398		$	1,332	$	933		$	437		$	177		$	126		$	713		$	43,137
Allowance ending balance
Individually evaluated for impairment	$	—		$	—		$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated for impairment	28,175			9,846			1,398			1,332		933			437			177			126			713			43,137
Total Allowance	$	28,175		$	9,846		$	1,398		$	1,332	$	933		$	437		$	177		$	126		$	713		$	43,137
Financing receivable:
Ending balance
Individually evaluated for impairment	$	9,672		$	2,260		$	—		$	—	$	5,333		$	1,492		$	60		$	—		$	—		$	18,817
Collectively evaluated for impairment	1,440,918			560,728			107,231			145,776		934,478			187,414			8,390			133,877			108,424			3,627,236
Acquired non-credit impaired loans (2)	106,153			80,567			28,143			—		41,159			16,866			5,775			—			—			278,663
Acquired credit impaired loans (1)	868			450			—			—		97			205			45			—			—			1,665
Total Portfolio	$	1,557,611		$	644,005		$	135,374		$	145,776	$	981,067		$	205,977		$	14,270		$	133,877		$	108,424		$	3,926,381

(1)Acquired credit impaired loans are evaluated on an individual basis.

(2)Acquired non-credit impaired loans are evaluated collectively, excluding loans that have subsequently moved to non-accrual status which are individually evaluated for impairment.

17

	COMMERCIAL									RESIDENTIAL			CONSUMER
December 31, 2017 (Dollars in thousands)	Real Estate			Business			Small Business Leases			Construction			Real Estate			Home Equity & Equity Lines			Personal			Education			Auto			Total
Allowance for loan losses:
Beginning balance	$	23,395		$	9,923		$	536		$	3,579		$	1,493		$	1,185		$	372		$	129		$	2,649		$	43,261
Charge-offs	(470		)	(525		)	(1,776		)	—			(246		)	(356		)	(167		)	(120		)	(1,816		)	(5,476		)
Recoveries	24			38			444			1			28			311			330			—			1,188			2,364
Provision (credit)	5,256			1,083			1,757			(2,617		)	(437		)	(649		)	(280		)	112			(1,107		)	3,118
Allowance ending balance	$	28,205		$	10,519		$	961		$	963		$	838		$	491		$	255		$	121		$	914		$	43,267
Allowance ending balance
Individually evaluated for impairment	$	—		$	1,500		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	1,500
Collectively evaluated for impairment	28,205			9,019			961			963			838			491			255			121			914			41,767
Total Allowance	$	28,205		$	10,519		$	961		$	963		$	838		$	491		$	255		$	121		$	914		$	43,267
Financing receivable:
Ending balance
Individually evaluated for impairment	$	19,336		$	13,091		$	—		$	—		$	6,062		$	1,375		$	100		$	—		$	—		$	39,964
Collectively evaluated for impairment	1,428,890			555,150			92,632			146,633			890,990			206,816			10,878			147,582			157,697			3,637,268
Acquired non-credit impaired loans (2)	128,659			100,613			48,622			—			46,414			19,712			6,237			—			—			350,257
Acquired credit impaired loans (1)	5,037			1,235			—			—			107			206			56			—			—			6,641
Total Portfolio	$	1,581,922		$	670,089		$	141,254		$	146,633		$	943,573		$	228,109		$	17,271		$	147,582		$	157,697		$	4,034,130

(1)Acquired credit impaired loans are evaluated on an individual basis.

(2)Acquired non-credit impaired loans are evaluated collectively, excluding loans that have subsequently moved to non-accrual status which are individually evaluated for impairment.

The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC Topic 310 for Loans and Debt Securities.  Under FASB ASC Topic 310 for Receivables, for all loan segments a loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. When all or a portion of the loan is deemed uncollectible, the uncollectible portion is charged-off. The measurement is based either on the fair value of the collateral if the loan is collateral dependent, the liquidation value, or the present value of expected future cash flows discounted at the loan’s effective interest rate.  Most of the Company’s commercial loans are collateral dependent and, therefore, the Company uses the value of the collateral to measure the loss. Any collateral or discounted cash flow deficiency for loans that are 90 days past due are charged-off. Impairment losses are included in the provision for loan losses.  Large groups of homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring.

Classified Loans

The Bank’s credit review process includes a risk classification of all commercial and residential loans that includes pass, special mention, substandard and doubtful.  The classification of a loan may change based on changes in the creditworthiness of the borrower. The description of the risk classifications are as follows:

A loan is classified as pass when payments are current and it is performing under the original contractual terms. A loan is classified as special mention when the borrower exhibits potential credit weakness or a downward trend which, if not checked or corrected, will weaken the asset or inadequately protect the Bank’s position.  While potentially weak, the borrower is currently marginally acceptable; no loss of principal or interest is envisioned.  A loan is classified as substandard when the borrower has a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. A substandard loan is inadequately protected

18

by the current net worth and paying capacity of the obligor, normal repayment from this borrower is in jeopardy, and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. A loan is classified as doubtful when a borrower has all weaknesses inherent in a loan classified as substandard with the added provision that: (1) the weaknesses make collection of debt in full on the basis of currently existing facts, conditions and values highly questionable and improbable; (2) serious problems exist to the point where a partial loss of principal is likely; and (3) the possibility of loss is extremely high, but because of certain important, reasonably specific pending factors which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens and additional refinancing plans. In all cases, loans are placed on non-accrual when 90 days past due or earlier if collection of principal or interest is considered doubtful.  The Company charges-off the collateral or discounted cash flow deficiency on all non-accrual loans.

The following tables set forth the amounts and percentage of the portfolio of classified asset categories for the commercial and residential loan portfolios at September 30, 2018 and December 31, 2017:

Commercial and Residential Loans

Credit Risk Internally Assigned

	September 30, 2018
(Dollars in thousands)	Commercial Real Estate				Commercial Business				Small Business Leases				Commercial Construction				Residential Real Estate				Total
Grade
Pass
Originated loans	$	1,434,907	92	%	$	555,406	86	%	$	107,231	79	%	$	145,776	100	%	$	938,194	96	%	$	3,181,514	93	%
Acquired non- credit impaired loans	103,058		7	%	73,259		11	%	28,143		21	%	—		—	%	41,053		4	%	245,513		7	%
Total Pass	1,537,965		99	%	628,665		97	%	135,374		100	%	145,776		100	%	979,247		100	%	3,427,027		100	%
Special Mention
Originated loans	3,716		—	%	4,285		1	%	—		—	%	—		—	%	—		—	%	8,001		—	%
Acquired non-credit impaired loans	208		—	%	1,162		—	%	—		—	%	—		—	%	—		—	%	1,370		—	%
Total Special Mention	3,924		—	%	5,447		1	%	—		—	%	—		—	%	—		—	%	9,371		—	%
Substandard
Originated loans	11,967		1	%	3,297		1	%	—		—	%	—		—	%	1,617		—	%	16,881		—	%
Acquired non-credit impaired loans	2,887		—	%	6,146		1	%	—		—	%	—		—	%	106		—	%	9,139		—	%
Acquired credit impaired loans	868		—	%	450		—	%	—		—	%	—		—	%	97		—	%	1,415		—	%
Total Substandard	15,722		1	%	9,893		2	%	—		—	%	—		—	%	1,820		—	%	27,435		—	%
Doubtful
Originated loans	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
Total Doubtful	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
Total	$	1,557,611	100	%	$	644,005	100	%	$	135,374	100	%	$	145,776	100	%	$	981,067	100	%	$	3,463,833	100	%

19

Commercial and Residential Loans

Credit Risk Internally Assigned

	December 31, 2017
(Dollars in thousands)	Commercial Real Estate				Commercial Business				Small Business Leases				Commercial Construction				Residential Real Estate				Total
Grade
Pass
Originated loans	$	1,436,514	91	%	$	554,813	83	%	$	92,632	66	%	$	146,633	100	%	$	895,475	95	%	$	3,126,067	91	%
Acquired non- credit impaired loans	124,575		8	%	90,371		13	%	48,622		34	%	—		—	%	46,192		5	%	309,760		9	%
Total Pass	1,561,089		99	%	645,184		96	%	141,254		100	%	146,633		100	%	941,667		100	%	3,435,827		100	%
Special Mention
Originated loans	5,779		—	%	1,910		—	%	—		—	%	—		—	%	—		—	%	7,689		—	%
Acquired non-credit impaired loans	483		—	%	4,338		1	%	—		—	%	—		—	%	—		—	%	4,821		—	%
Total Special Mention	6,262		—	%	6,248		1	%	—		—	%	—		—	%	—		—	%	12,510		—	%
Substandard
Originated loans	5,933		1	%	3,565		1	%	—		—	%	—		—	%	1,577		—	%	11,075		—	%
Acquired non-credit impaired loans	3,601		—	%	5,904		1	%	—		—	%	—		—	%	222		—	%	9,727		—	%
Acquired credit impaired loans	5,037		—	%	1,235		—	%	—		—	%	—		—	%	107		—	%	6,379		—	%
Total Substandard	14,571		1	%	10,704		2	%	—		—	%	—		—	%	1,906		—	%	27,181		—	%
Doubtful
Originated loans	—		—	%	7,953		1	%	—		—	%	—		—	%	—		—	%	7,953		—	%
Total Doubtful	—		—	%	7,953		1	%	—		—	%	—		—	%	—		—	%	7,953		—	%
Total	$	1,581,922	100	%	$	670,089	100	%	$	141,254	100	%	$	146,633	100	%	$	943,573	100	%	$	3,483,471	100	%

During 2017, one shared national credit with an outstanding balance of $7.6 million as of June 30, 2018 was downgraded to doubtful and changed to non-accrual status based on the results of a shared national credit examination performed by regulators. During the three months ended September 30, 2018, this $7.6 million non-performing shared national credit was sold. Management had established a $1.5 million specific valuation allowance to cover risk associated with this loan as of June 30, 2018 and December 31, 2017.  The actual loss for the loan was $766 thousand.

The Bank’s credit review process is based on payment history for all consumer loans.  The collateral deficiency on consumer loans is charged-off when they become 90 days delinquent except for education loans which are guaranteed by the U.S. government.  Non-performing consumer loans include loans on non-accrual status and education loans that are greater than 90 days delinquent.  The following tables set forth the consumer loan risk profile based on payment activity as of September 30, 2018 and December 31, 2017:

Consumer and Residential Loans

Credit Risk Internally Assigned

	September 30, 2018
(Dollars in thousands)	Home Equity & Lines of Credit				Personal				Education				Auto				Total
Performing
Originated loans	$	187,622	91	%	$	8,393	60	%	$	120,675	90	%	$	108,424	100	%	$	425,114	92	%
Acquired non-credit impaired loans	16,791		8	%	5,589		39	%	—		—	%	—		—	%	22,380		5	%
Acquired credit impaired loans	205		—	%	45		—	%	—		—	%	—		—	%	250		—	%
Total Performing	204,618		99	%	14,027		99	%	120,675		90	%	108,424		100	%	447,744		97	%
Nonperforming
Originated loans	1,284		1	%	57		—	%	13,202		10	%	—		—	%	14,543		3	%
Acquired non-credit impaired loans	75		—	%	186		1	%	—		—	%	—		—	%	261		—	%
Acquired credit impaired loans	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
Total Nonperforming	1,359		1	%	243		1	%	13,202		10	%	—		—	%	14,804		3	%
Total	$	205,977	100	%	$	14,270	100	%	$	133,877	100	%	$	108,424	100	%	$	462,548	100	%

20

	December 31, 2017
(Dollars in thousands)	Home Equity & Lines of Credit				Personal				Education				Auto				Total
Performing
Originated loans	$	207,036	90	%	$	10,883	63	%	$	133,430	90	%	$	157,697	100	%	$	509,046	92	%
Acquired non-credit impaired loans	19,621		9	%	5,987		35	%	—		—	%	—		—	%	25,608		5	%
Acquired credit impaired loans	206		—	%	56		—	%	—		—	%	—		—	%	262		—	%
Total Performing	226,863		99	%	16,926		98	%	133,430		90	%	157,697		100	%	534,916		97	%
Nonperforming
Originated loans	1,155		1	%	95		1	%	14,152		10	%	—		—	%	15,402		3	%
Acquired non-credit impaired loans	91		—	%	250		1	%	—		—	%	—		—	%	341		—	%
Acquired credit impaired loans	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
Total Nonperforming	1,246		1	%	345		2	%	14,152		10	%	—		—	%	15,743		3	%
Total	$	228,109	100	%	$	17,271	100	%	$	147,582	100	%	$	157,697	100	%	$	550,659	100	%

Loans Acquired with Deteriorated Credit Quality

The outstanding principal balance and related carrying amount of loans acquired with deteriorated credit quality, for which the Company applies the provisions of ASC 310-30, as of September 30, 2018, are as follows:

	September 30,
(Dollars in thousands)	2018
Outstanding principal balance	$	2,694
Carrying amount	1,665

Loan Delinquencies and Non-accrual Loans

The Company monitors the past due and non-accrual status of loans in determining the loss classification, impairment status and the allowance for loan losses.  Generally, all loans past due 90 days or more are put on non-accrual status.  Education loans greater than 90 days delinquent continue to accrue interest as they are U.S. government guaranteed with little risk of credit loss.

The following tables provide information about delinquent and non-accrual loans in the Company’s portfolio at the dates indicated:

21

Aged Analysis of Past Due and Non-accrual Financing Receivables

As of September 30, 2018

																											Recorded
	30-59				60-89				> 90																		Investment
	Days				Days				Days				Total				Acquired						Total				>90 Days
	Past				Past				Past				Past				Credit						Financing				And		Non-
(Dollars in thousands)	Due				Due				Due				Due				Impaired		Current				Receivables				Accruing		Accruing (1)
Commercial:
Commercial real estate	$	912	7	%	$	2,393	34	%	$	2,977	15	%	$	6,282	15	%	$	868	$	1,550,461	41	%	$	1,557,611	41	%	$	—	$	6,041	38	%
Commercial business loans	1,091		8	%	797		11	%	743		4	%	2,631		7	%	450		640,924		16	%	644,005		16	%	—		2,896		19	%
Commercial small business leases	705		5	%	441		6	%	—		—	%	1,146		3	%	—		134,228		3	%	135,374		3	%	—		—		—	%
Commercial construction	—		—	%	—		—	%	—		—	%	—		—	%	—		145,776		4	%	145,776		4	%	—		—		—	%
Total commercial	$	2,708	20	%	$	3,631	51	%	$	3,720	19	%	$	10,059	25	%	$	1,318	$	2,471,389	64	%	$	2,482,766	64	%	$	—	$	8,937	57	%
Residential:
Residential real estate	$	1,687	12	%	$	101	1	%	$	1,978	10	%	$	3,766	9	%	$	97	$	977,204	25	%	$	981,067	25	%	$	—	$	4,888	32	%
Total residential	$	1,687	12	%	$	101	1	%	$	1,978	10	%	$	3,766	9	%	$	97	$	977,204	25	%	$	981,067	25	%	$	—	$	4,888	32	%
Consumer loans:
Home equity & lines of credit	$	729	5	%	$	192	3	%	$	470	2	%	$	1,391	3	%	$	205	$	204,381	5	%	$	205,977	5	%	$	—	$	1,359	9	%
Personal	113		1	%	16		—	%	110		1	%	239		1	%	45		13,986		—	%	14,270		—	%	—		243		2	%
Education	5,650		41	%	2,843		41	%	13,202		68	%	21,695		54	%	—		112,182		3	%	133,877		3	%	13,202		—		—	%
Automobile	2,819		21	%	258		4	%	—		—	%	3,077		8	%	—		105,347		3	%	108,424		3	%	—		—		—	%
Total consumer	$	9,311	68	%	$	3,309	48	%	$	13,782	71	%	$	26,402	66	%	$	250	$	435,896	11	%	$	462,548	11	%	$	13,202	$	1,602	11	%
Total	$	13,706	100	%	$	7,041	100	%	$	19,480	100	%	$	40,227	100	%	$	1,665	$	3,884,489	100	%	$	3,926,381	100	%	$	13,202	$	15,427	100	%

(1)Non-accruing loans do not include $1.7 million of acquired credit impaired loans, which have been recorded at their fair value at acquisition.

22

Aged Analysis of Past Due and Non-accrual Financing Receivables

As of December 31, 2017

																											Recorded
	30-59				60-89				> 90																		Investment
	Days				Days				Days				Total				Acquired						Total				>90 Days
	Past				Past				Past				Past				Credit						Financing				And		Non-
(Dollars in thousands)	Due				Due				Due				Due				Impaired		Current				Receivables				Accruing		Accruing
Commercial:
Commercial real estate	$	719	4	%	$	1,304	13	%	$	1,899	10	%	$	3,922	8	%	$	5,037	$	1,572,963	39	%	$	1,581,922	38	%	$	—	$	3,273	16	%
Commercial business loans	1,291		7	%	1,680		16	%	495		3	%	3,466		7	%	1,235		665,388		17	%	670,089		17	%	—		9,828		48	%
Commercial small business leases	1,447		8	%	584		6	%	4		—	%	2,035		4	%	—		139,219		3	%	141,254		4	%	—		—		—	%
Commercial construction	—		—	%	—		—	%	—		—	%	—		—	%	—		146,633		4	%	146,633		4	%	—		—		—	%
Total commercial	$	3,457	19	%	$	3,568	35	%	$	2,398	13	%	$	9,423	19	%	$	6,272	$	2,524,203	63	%	$	2,539,898	63	%	$	—	$	13,101	64	%
Residential:
Residential real estate	$	2,132	11	%	$	1,113	11	%	$	2,233	11	%	$	5,478	11	%	$	107	$	937,988	24	%	$	943,573	23	%	$	—	$	5,829	28	%
Total residential	$	2,132	11	%	$	1,113	11	%	$	2,233	11	%	$	5,478	11	%	$	107	$	937,988	24	%	$	943,573	23	%	$	—	$	5,829	28	%
Consumer loans:
Home equity & lines of credit	$	856	5	%	$	285	3	%	$	582	3	%	$	1,723	4	%	$	206	$	226,180	6	%	$	228,109	6	%	$	—	$	1,246	6	%
Personal	198		1	%	118		1	%	234		1	%	550		1	%	56		16,665		—	%	17,271		—	%	—		345		2	%
Education	8,328		44	%	4,821		46	%	14,152		72	%	27,301		56	%	—		120,281		3	%	147,582		4	%	14,152		—		—	%
Automobile	3,830		20	%	447		4	%	—		—	%	4,277		9	%	—		153,420		4	%	157,697		4	%	—		—		—	%
Total consumer	$	13,212	70	%	$	5,671	54	%	$	14,968	76	%	$	33,851	70	%	$	262	$	516,546	13	%	$	550,659	14	%	$	14,152	$	1,591	8	%
Total	$	18,801	100	%	$	10,352	100	%	$	19,599	100	%	$	48,752	100	%	$	6,641	$	3,978,737	100	%	$	4,034,130	100	%	$	14,152	$	20,521	100	%

(1)Non-accruing loans do not include $6.6 million of loans acquired with deteriorated credit quality, which have been recorded at their fair value at acquisition.

23

Troubled Debt Restructured Loans

The Bank determines whether a restructuring of debt constitutes a troubled debt restructuring (“TDR”) in accordance with guidance under FASB ASC Topic 310 Receivables. The Bank considers a loan a TDR when the borrower is experiencing financial difficulty and the Bank grants a concession that it would not otherwise consider but for the borrower’s financial difficulties.  A TDR includes a modification of debt terms or assets received in satisfaction of the debt (including a foreclosure or a deed in lieu of foreclosure) or a combination of types.  The Bank evaluates selective criteria to determine if a borrower is experiencing financial difficulty, including the ability of the borrower to obtain funds from sources other than the Bank at market rates.  The Bank considers all TDR loans as impaired loans and, generally, they are put on non-accrual status.  The Bank will not consider the loan a TDR if the loan modification was made for customer retention purposes and the modification reflects prevailing market conditions. The Bank’s policy for returning a loan to accruing status requires the preparation of a well-documented credit evaluation, which includes the following:

·A review of the borrower’s current financial condition in which the borrower must demonstrate sufficient cash flow to support the repayment of all principal and interest including any amounts previously charged-off;

·An updated appraisal or home valuation, which must demonstrate sufficient collateral value to support the debt;

·Sustained performance based on the restructured terms for at least six consecutive months; and

·Approval by the Special Assets Committee, which consists of the Chief Credit Officer, the Chief Financial Officer and other members of senior management.

The following table summarizes loans whose terms were modified in a manner that met the definition of a TDR as of September 30, 2018 and 2017.

	September 30,			September 30,
	2018			2017
(Dollars in thousands)	No. of Loans	Balance		No. of Loans	Balance
Commercial:
Commercial real estate	—	$	—	1	$	1,254
Commercial business loans	—	—		1	69
Total commercial	—	—		2	1,323
Residential:
Residential real estate	4	194		6	417
Total real estate loans	4	194		6	417
Consumer loans:
Home equity & lines of credit	1	54		2	70
Total consumer loans	1	54		2	70
Total loans	5	$	248	10	$	1,810

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The following tables summarize information about TDRs as of and for the nine months ended September 30, 2018 and 2017:

	For the Nine Months Ended September 30, 2018
(Dollars in thousands, except number of loans)	No. of Loans	Balance
Loans modified during the period in a manner that met the definition of a TDR	—	$	—
Modifications granted:
Reduction of outstanding principal due	—	—
Deferral of principal amounts due	—	—
Temporary reduction in interest rate	—	—
Deferral of interest due	—	—
Below market interest rate granted	—	—
Outstanding principal balance immediately before modification	—	—
Outstanding principal balance immediately after modification	—	—
Aggregate principal charge-off recognized on TDRs outstanding at period end since origination	—	—
Outstanding principal balance at period end	5	248
TDRs that re-defaulted subsequent to being modified (in the past twelve months)	1	24

	For the Nine Months Ended September 30, 2017
(Dollars in thousands, except number of loans)	No. of Loans	Balance
Loans modified during the period in a manner that met the definition of a TDR	5	$	1,472
Modifications granted:
Reduction of outstanding principal due	—	—
Deferral of principal amounts due	3	188
Temporary reduction in interest rate	2	1,284
Deferral of interest due	—	—
Below market interest rate granted	—	—
Outstanding principal balance immediately before modification	—	—
Outstanding principal balance immediately after modification	—	—
Aggregate principal charge-off recognized on TDRs outstanding at period end since origination	—
Outstanding principal balance at period end	10	1,810
TDRs that re-defaulted subsequent to being modified (in the past twelve months)	1	61

Impaired Loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the extent of the impairment in accordance with guidance under FASB ASC Topic 310 for Receivables.  The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value or discounted cash flows.  However, collateral value is predominantly used to assess the fair value of an impaired loan. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral or expected repayments exceed the recorded investments in such loans.

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Components of Impaired Loans

Impaired Loans

Year to date September 30, 2018

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Using Cash Basis
Impaired loans with no related specific allowance recorded:
Commercial Real Estate	$	6,041	$	6,210	$	—	$	3,615	$	—	$	—
Commercial Business	2,896		3,109		—		2,758		—		—
Commercial small business leases	—		—		—		—		—		—
Commercial Construction	—		—		—		—		—		—
Residential Real Estate	4,888		5,588		—		5,921		—		—
Home Equity and Lines of Credit	1,359		1,359		—		1,388		—		—
Personal	243		243		—		286		—		—
Education	—		—		—		—		—		—
Auto	—		—		—		1		—		—
Total Impaired Loans:	$	15,427	$	16,509	$	—	$	13,969	$	—	$	—
Impaired loans with a related specific allowance recorded:
Commercial Business	$	—	$	—	$	—	$	6,334	$	—	$	—
Total impaired loans with a related specific allowance recorded:	$	—	$	—	$	—	$	6,334	$	—	$	—
Total Impaired Loans:
Commercial	$	8,937	$	9,319	$	—	$	12,707	$	—	$	—
Residential	4,888		5,588		—		5,921		—		—
Consumer	1,602		1,602		—		1,675		—		—
Total	$	15,427	$	16,509	$	—	$	20,303	$	—	$	—

The impaired loans table above does not include $1.7 million of acquired credit impaired loans, which have been recorded at their fair value at acquisition.

26

Impaired Loans

For the Year Ended December 31, 2017

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Using Cash Basis
Impaired loans with no related specific allowance recorded:
Commercial Real Estate	$	4,515	$	4,548	$	—	$	2,515	$	56	$	—
Commercial Business	2,112		2,272		—		2,179		14		—
Commercial small business leases	—		—		—		—		—		—
Commercial Construction	—		—		—		—		—		—
Residential Real Estate	5,829		6,546		—		6,834		—		—
Home Equity and Lines of Credit	1,246		1,276		—		1,109		—		—
Personal	345		345		—		240		—		—
Education	—		—		—		—		—		—
Auto	—		—		—		6		—		—
Total Impaired Loans:	$	14,047	$	14,987	$	—	$	12,883	$	70	$	—
Impaired loans with a related specific allowance recorded:
Commercial Business	$	7,953	$	7,953	$	1,500	$	8,954	$	—	$	—
Total impaired loans with a related specific allowance recorded:	$	7,953	$	7,953	$	1,500	$	8,954	$	—	$	—
Total Impaired Loans:
Commercial	$	14,580	$	14,773	$	1,500	$	13,648	$	70	$	—
Residential	5,829		6,546		—		6,834		—		—
Consumer	1,591		1,621		—		1,355		—		—
Total	$	22,000	$	22,940	$	1,500	$	21,837	$	70	$	—

The impaired loans table above does not include $6.6 million of acquired credit impaired loans, which have been recorded at their fair value at acquisition.

Generally, the Company will charge-off the collateral or discounted cash flow deficiency on all impaired loans.  Interest income that would have been recorded for the nine months ended September 30, 2018, had impaired loans been current according to their original terms, amounted to $719 thousand.  Non-performing loans (which include non-accrual loans and loans past due 90 days or more and still accruing) at September 30, 2018 and December 31, 2017 amounted to $28.6 million and $34.7 million, respectively, and included $13.2 million and $14.2 million, respectively, of government guaranteed student loans.  The decrease in non-performing loans can primarily be attributed the previously mentioned sale of a $7.6 million shared national credit during the three months ended September 30, 2018.

27

NOTE 9 — GOODWILL AND OTHER INTANGIBLES

The goodwill and other intangible assets arising from acquisitions are accounted for in accordance with the accounting guidance in FASB ASC Topic 350 Intangibles - Goodwill and Other. As of September 30, 2018, the other intangibles consisted of $1.4 million of core deposit intangibles, which are amortized over an estimated useful life of ten years.

Goodwill and other intangibles at September 30, 2018 are summarized below.

(Dollars in thousands)	Goodwill			Intangibles
Balance at January 1, 2018	$	169,002		$	2,884
Amortization	—			(597		)
Sale of Insurance Agency	(9,331		)	(859		)
Balance at September 30, 2018	$	159,671		$	1,428

During the quarter ended September 30, 2018, the Company entered into an asset purchase agreement with a third party to sell the net assets of Beneficial Insurance Services, LLC and exit that business.  In connection with that sale, the Company received net proceeds of $14.1 million and realized a net gain of $3.3 million as the sale proceeds exceeded the carrying amount for Beneficial Insurance Services including goodwill and intangible assets.  Goodwill and intangible assets that related to Beneficial Insurance Services decreased $10.2 million during the quarter ended September 30, 2018 as a result of the sale.

During 2017, management reviewed qualitative factors for the bank unit including financial performance, market changes and general economic conditions and noted there was not a significant change in any of these factors as compared to 2016. Accordingly, it was determined that it was more likely than not that the fair value of the banking unit continued to be in excess of its carrying amount as of December 31, 2017. As a result, management concluded that there was no impairment of goodwill during the year ended December 31, 2017.

During the nine months ended September 30, 2018, the Company noted no indicators of impairment as it relates to goodwill or other intangibles.

NOTE 10 — OTHER ASSETS

The following table provides selected information on other assets at September 30, 2018 and December 31, 2017:

	September 30,		December 31,
(Dollars in thousands)	2018		2017
Investments in affordable housing and other investments	$	6,103	$	4,053
Prepaid assets	3,802		2,691
Net deferred tax assets	22,023		22,975
Servicing rights	2,655		2,341
Interest rate swaps	11,036		2,713
Receivable from sale of insurance agency	14,059		—
Other assets	3,738		4,614
Total other assets	$	63,416	$	39,387

The Company follows the authoritative guidance under ASC 860-50 - Servicing Assets and Liabilities to account for its servicing rights. The Company utilizes the fair value measurement method to value its servicing rights at fair value in accordance with ASC 860-50.  Under the fair value measurement method, the Company measures its servicing rights at fair value at each reporting date and reports changes in the fair value of its servicing rights in earnings in the period in which the changes occur.  See Note 21 for further discussion of servicing rights.

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NOTE 11 — DEPOSITS

Deposits consisted of the following major classifications at September 30, 2018 and December 31, 2017:

	September 30,		% of Total		December 31,		% of Total
(Dollars in thousands)	2018		Deposits		2017		Deposits
Non-interest bearing deposits	$	552,111	13.0	%	$	563,185	13.6	%
Interest-earning checking accounts	1,074,407		25.3	%	898,263		21.6	%
Municipal checking accounts	124,116		2.9	%	123,697		3.0	%
Money market accounts	395,405		9.3	%	419,773		10.1	%
Savings accounts	1,284,764		30.3	%	1,288,875		31.1	%
Certificates of deposit	816,177		19.2	%	856,700		20.6	%
Total deposits	$	4,246,980	100.0	%	$	4,150,493	100.0	%

NOTE 12 — BORROWED FUNDS

Borrowed funds at September 30, 2018 and December 31, 2017 are summarized as follows:

(Dollars in thousands)	September 30, 2018		December 31, 2017
FHLB advances	$	515,000	$	515,000
Statutory trust debenture	—		25,439
Total borrowed funds	$	515,000	$	540,439

During the first quarter of 2018, the Company paid off the statutory trust debenture of $25.4 million that was at a rate of 3.17%.

The Company’s borrowing capacity with the FHLB of Pittsburgh is collateralized by loans. At September 30, 2018 and December 31, 2017, loans in the amount of $2.8 billion and $2.7 billion, respectively, collateralized the Company’s total borrowing capacity with the FHLB of Pittsburgh of $2.1 billion.  At September 30, 2018, remaining borrowings available with the FHLB were $1.6 billion.  The Company also pledges loans to secure its available borrowing capacity at the Federal Reserve Bank of Philadelphia.  At September 30, 2018 and December 31, 2017, loans in the amount of $269.7 million and $193.6 million, respectively, were pledged to secure the Company’s borrowing capacity at the Federal Reserve Bank of Philadelphia of $187.4 million and $146.2 million, respectively.

NOTE 13 — OTHER LIABILITIES

The following table provides selected information on other liabilities at September 30, 2018 and December 31, 2017:

	September 30,		December 31,
(Dollars in thousands)	2018		2017
Accrued pension and other postretirement benefits	$	25,014	$	27,888
Other accrued expenses	13,997		14,351
Mortgage escrow	8,176		10,952
Deferred rent	7,471		7,425
Accrued interest	3,012		3,039
Income taxes payable	1,416		—
Other liabilities	9,411		9,351
Total other liabilities	$	68,497	$	73,006

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NOTE 14 — REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. In early July 2013, the Federal Reserve Board and the Office of the Comptroller of the Currency approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

In July 2013, the Federal Deposit Insurance Corporation and the Federal Reserve Board approved a new rule that substantially amended the regulatory risk-based capital rules applicable to Beneficial Bank and Beneficial Bancorp. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The rules include new risk-based capital and leverage ratios, which became effective on January 1, 2015, and revised the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement started to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution is also subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

As of September 30, 2018, the Company’s and the Bank’s current capital levels exceed the required capital amounts to be considered “well capitalized” and we believe they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.

30

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of September 30, 2018 and December 31, 2017:

									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(Dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
As of September 30, 2018:
Tier 1 Leverage (to average assets)	$	895,384	15.78	%	$	226,937	4.00	%	$	283,671	5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	895,384		22.55	%	178,652		4.50	%	258,053		6.50	%
Tier 1 Capital (to risk weighted assets)	895,384		22.55	%	238,203		6.00	%	317,604		8.00	%
Total Capital (to risk weighted assets)	938,636		23.64	%	317,604		8.00	%	397,005		10.00	%
As of December 31, 2017:
Tier 1 Leverage (to average assets)	$	914,552	16.19	%	$	225,909	4.00	%	$	282,387	5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	889,113		22.12	%	180,841		4.50	%	261,215		6.50	%
Tier 1 Capital (to risk weighted assets)	914,552		22.76	%	241,121		6.00	%	321,495		8.00	%
Total Capital (to risk weighted assets)	958,013		23.84	%	321,495		8.00	%	401,869		10.00	%

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of September 30, 2018 and December 31, 2017:

									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(Dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
As of September 30, 2018:
Tier 1 Leverage (to average assets)	$	757,577	13.36	%	$	226,876	4.00	%	$	283,596	5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	757,577		19.10	%	178,521		4.50	%	257,864		6.50	%
Tier 1 Capital (to risk weighted assets)	757,577		19.10	%	238,028		6.00	%	317,371		8.00	%
Total Capital (to risk weighted assets)	800,829		20.19	%	317,371		8.00	%	396,714		10.00	%
As of December 31, 2017:
Tier 1 Leverage (to average assets)	$	816,461	14.46	%	$	225,870	4.00	%	$	282,337	5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	816,461		20.34	%	180,662		4.50	%	260,956		6.50	%
Tier 1 Capital (to risk weighted assets)	816,461		20.34	%	240,882		6.00	%	321,177		8.00	%
Total Capital (to risk weighted assets)	859,852		21.42	%	321,177		8.00	%	401,471		10.00	%

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NOTE 15 — INCOME TAXES

For the three months ended September 30, 2018, the Company recorded a provision for income taxes of $4.3 million, reflecting an effective tax rate of 25.9%, compared to a provision for income taxes of $5.5 million, reflecting an effective tax rate of 36.8%, for the three months ended September 30, 2017.  For the nine months ended September 30, 2018, the Company recorded a provision for income taxes of $10.8 million, reflecting an effective tax rate of 24.2%, compared to a provision for income taxes of $13.7 million, reflecting an effective tax rate of 33.5%, for the nine months ended September 30, 2017. The decrease in the effective tax rate for the three and nine months ended September 30, 2018 compared to the same periods a year ago was primarily due to the passage of the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% from 35%.

As of September 30, 2018, the Company had net deferred tax assets totaling $22.0 million.  These deferred tax assets can only be realized if the Company generates sufficient taxable income in the future.  If it cannot, a valuation allowance is established.  The Company regularly evaluates the realizability of deferred tax asset positions. In determining whether a valuation allowance is necessary, the Company considers the level of taxable income in prior years to the extent that carry backs are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented. The Company currently maintains a valuation allowance for certain state net operating losses that management believes it is more likely than not that such deferred tax assets will not be realized. The Company expects to realize the remaining deferred tax assets over the allowable carry forward periods. Therefore, no valuation allowance is deemed necessary against its remaining federal or remaining state deferred tax assets as September 30, 2018. However, if an unanticipated event occurs that materially changes pre-tax and taxable income in future periods, an increase in the valuation allowance may become necessary and it could be material to the Company’s financial statements.

NOTE 16 — PENSION AND OTHER POSTRETIREMENT BENEFITS

The Bank has noncontributory defined benefit pension plans covering many of its employees.  Additionally, the Company sponsors nonqualified supplemental employee retirement plans for certain participants.  The Bank also provides certain postretirement benefits to qualified former employees.  These postretirement benefits principally pertain to certain health and life insurance coverage. Information relating to these employee benefit programs is included in the tables that follow.

Effective June 30, 2008, the defined pension benefits for Bank employees were frozen at the current levels. Additionally, the Bank enhanced its 401(k) Plan and combined it with its Employee Stock Ownership Plan to fund employer contributions.  Conestoga Bank had a defined benefit pension plan covering less than twenty employees.  The Bank intends on combining this plan, which had been frozen by Conestoga Bank, into the Bank’s existing defined benefit pension plan.

The components of net pension cost are as follows:

(Dollars in thousands)

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended September 30,						Three Months Ended September 30,
	2018			2017			2018			2017
Service cost	$	—		$	—		$	9		$	19
Interest cost	764			834			124			183
Expected return on assets	(1,697		)	(1,572		)	—			—
Amortization of loss	418			490			(27		)	47
Amortization of prior service cost	—			—			(121		)	(121		)
Net periodic pension (benefit) cost	$	(515	)	$	(248	)	$	(15	)	$	128

32

	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Service cost	$	—		$	—		$	81		$	91
Interest cost	2,409			2,524			486			549
Expected return on assets	(5,086		)	(4,701		)	—			—
Amortization of loss	1,532			1,725			157			174
Amortization of prior service cost	—			—			(364		)	(364		)
Net periodic pension (benefit) cost	$	(1,145	)	$	(452	)	$	360		$	450

NOTE 17 — STOCK BASED COMPENSATION

Stock-based compensation is accounted for in accordance with FASB ASC Topic 718 for Compensation — Stock Compensation. The Company establishes fair value for its equity awards to determine their cost. The Company recognizes the related expense for employees over the appropriate vesting period, or when applicable, service period, using the straight-line method. However, consistent with the guidance, the amount of stock-based compensation recognized at any date must at least equal the portion of the grant date value of the award that is vested at that date. As a result, it may be necessary to recognize the expense using a ratable method.

Under the 2016 Omnibus Incentive Plan (“the 2016 Plan”), the Company has granted 2,595,614 of restricted stock awards to employees, officers and directors.  The restricted stock awards granted to directors vest generally over a 12 to 31 month period and the restricted stock awards granted to employees and officers vest over a three year period. Restricted stock awards include performance awards granted to certain officers of the Company that will vest only if the Company exceeds threshold goals related to credit quality, return on average assets and total shareholder return. Upon the adoption of the 2016 Plan, the Company’s 2008 Equity Incentive Plan (“EIP”) was terminated. However, outstanding awards under the 2008 EIP remain in effect in accordance with their original terms.

Compensation expense related to the stock awards is recognized ratably over the vesting period in an amount which totals the market price of the Company’s stock at the grant date. The expense recognized for the three and nine months ended September 30, 2018 was $3.4 million and $10.0 million, respectively, compared to $3.4 million and $10.0 million, respectively, for the three and nine months ended September 30, 2017.

The following table summarizes the non-vested stock award activity for the nine months ended September 30, 2018:

Summary of Non-vested Stock Award Activity	Number of Shares		Weighted Average Grant Price
Non-vested Stock Awards outstanding, January 1, 2018	2,131,972		$	13.51
Issued	164,642		16.60
Vested	(978,056	)	13.40
Forfeited	(7,354	)	15.07
Non-vested Stock Awards outstanding, September 30, 2018	1,311,204		13.97

33

The following table summarizes the non-vested stock award activity for the three months ended September 30, 2017:

Summary of Non-vested Stock Award Activity	Number of Shares		Weighted Average Grant Price
Non-vested Stock Awards outstanding, January 1, 2017	2,960,572		$	13.07
Issued	154,753		18.00
Vested	(904,019	)	13.10
Forfeited	(79,334	)	10.66
Non-vested Stock Awards outstanding, September 30, 2017	2,131,972		13.51

The fair value of the 978,056 shares that vested during the nine months ended September 30, 2018 was $16.1 million. The fair value of the 904,019 shares that vested during the nine months ended September 30, 2017 was $14.4 million.

The 2008 EIP authorized the grant of options to officers, employees, and directors of the Company to acquire shares of common stock with an exercise price equal to the fair value of the common stock at the grant date. Options expire ten years after the date of grant, unless terminated earlier under the option terms. Options are granted at the then fair market value of the Company’s stock. The options were valued using the Black-Scholes option pricing model. The Company did not grant any options during the nine months ended September 30, 2018 and 2017. All options issued contain vesting conditions that require the participant’s continued service. The options generally vest and are exercisable over five years. Compensation expense for the options totaled $145 thousand and $443 thousand for the three and nine months ended September 30, 2018, respectively, compared to $197 thousand and $724 for the three and nine months ended September 30, 2017.

A summary of option activity as of September 30, 2018 and changes during the nine month period ended September 30, 2018 is presented below:

	Number of Options		Weighted Exercise Price per Shares
January 1, 2018	1,727,249		$	9.62
Granted	—		—
Exercised	(288,962	)	10.45
Forfeited	—		—
Expired	—		—
September 30, 2018	1,438,287		9.46

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A summary of option activity as of September 30, 2017 and changes during the nine month period ended September 30, 2017 is presented below:

	Number of Options		Weighted Exercise Price per Shares
January 1, 2017	2,884,087		$	9.59
Granted	—		—
Exercised	(1,015,943	)	9.50
Forfeited	(37,175	)	9.78
Expired	—		—
September 30, 2017	1,830,969		9.64

The weighted average remaining contractual term was approximately 4.40 years and the aggregate intrinsic value was $10.7 million for options outstanding as of September 30, 2018.  As of September 30, 2018, exercisable options totaled 1,263,977 with an average weighted exercise price of $9.25 per share, a weighted average remaining contractual term of approximately 4.21 years, and an aggregate intrinsic value of $9.7 million. The weighted average remaining contractual term was approximately 4.59 years and the aggregate intrinsic value was $12.7 million for options outstanding as of September 30, 2017.  As of September 30, 2017, exercisable options totaled 1,413,527 with an average weighted exercise price of $9.43 per share, a weighted average remaining contractual term of approximately 4.07 years, and an aggregate intrinsic value of $10.1 million.

As of September 30, 2018, there was $341 thousand of total unrecognized compensation cost related to options and $10.9 million in unrecognized compensation cost related to non-vested stock awards granted.  As of September 30, 2017, there was $1.0 million of total unrecognized compensation cost related to options and $21.9 million in unrecognized compensation cost related to non-vested stock awards granted.  The average weighted lives for the option expense were 0.86 and 1.57 years as of September 30, 2018 and September 30, 2017, respectively. The average weighted lives for the stock award expense 1.21 and 1.82 years at September 30, 2018 and September 30, 2017, respectively.

NOTE 18 — COMMITMENTS AND CONTINGENCIES

At September 30, 2018 and December 31, 2017, the Company had outstanding commitments to purchase or originate new loans or leases aggregating $17.2 million and $29.4 million, respectively, commitments to customers on available lines of credit of $480.2 million and $443.1 million, respectively, commitments to fund commercial construction and other advances of $234.6 million and $159.3 million, respectively, and standby letters of credit of $25.8 million and $29.4 million, respectively.  Commitments are issued in accordance with the same policies and underwriting procedures as settled loans.  The Bank had a reserve for its unfunded commitments of $112 thousand and $124 thousand at September 30, 2018 and December 31, 2017, respectively.

The Company and its directors have been named in a lawsuit filed in Maryland state circuit court regarding compensation levels of directors in connection with equity awards granted in the second quarter of 2016 under the Company’s 2016 Omnibus Incentive Plan. The defendants believe the lawsuit, alleging breach of fiduciary duty and unjust enrichment under Maryland law, is without merit and intend to vigorously defend it.  During the first quarter of 2018, the Company participated in a mediation at which time all parties to the lawsuit, including the Company’s insurance carrier, agreed to a proposed settlement of the lawsuit.  The Company has denied any liability in connection with the lawsuit but agreed to a proposed settlement to avoid a costly and protracted process to litigate this matter.  Notification of the settlement was sent to the shareholders in June 2018 and the terms of the settlement were approved by the Maryland Court in

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September 2018, subject to a 30 day appeal by any shareholders. The 30 day appeal period has elapsed and the final settlement will not have a material impact on the Company’s financial statements.

On October 15, 2018, one purported Beneficial stockholder filed a putative class action lawsuit against Beneficial and the members of the Beneficial board of directors in the United States District Court for the Southern District of New York, captioned Dappollone v. Beneficial Bancorp, Inc., et al., Docket No. 1:18-cv-09395. The plaintiff, on behalf of himself and similarly situated Beneficial stockholders, generally alleges that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by disclosing materially incomplete and misleading information about the merger to Beneficial stockholders. The plaintiff seeks injunctive relief, unspecified damages and an award of attorneys’ fees and expenses.

On October 19, 2018, another purported Beneficial stockholder filed a putative derivative and class action lawsuit against Beneficial, the members of the Beneficial board of directors and WSFS Bank in the Circuit Court for Baltimore City, Maryland, on behalf of himself and similarly situated Beneficial stockholders, and derivatively on behalf of Beneficial, captioned Parshall v. Farnesi et al., Case No.  The plaintiff generally alleges that the Beneficial board of directors breached its fiduciary obligations by approving the terms of the merger, including allegedly inadequate merger consideration and certain deal protection devices, and making materially incomplete disclosures about the merger to Beneficial stockholders. The plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses.

On October 31, 2018, three other purported Beneficial stockholders filed separate lawsuits against Beneficial and the members of the Beneficial board of directors in the District Court for the District of Maryland, captioned Wolenter v. Beneficial Bancorp, Inc. et al. (Case No. 1:18-cv-03379-JKB), Karp v. Beneficial Bancorp, Inc. et. al. (Case No. 1:18-cv-03381-ELH), and Bushanksy v. Beneficial Bancorp, Inc. et al. (Case No. 1:18-cv-03382-DKC). The plaintiffs each generally allege that the registration statement filed with the SEC on September 27, 2018 contains materially misleading omissions or misrepresentations in violation of Section 14(a) and Section 20(a) of the Exchange Act. The plaintiffs each seek injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses.

Periodically, there have been various claims and lawsuits against the Company, such as claims to enforce liens, condemnation proceedings on properties in which it holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business.  Except as discussed above, the Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, results of operations or cash flows.

NOTE 19 — RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the FASB issued ASU 2018-15: Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.  The Company evaluated the amendments of this update and does not anticipate an impact to the consolidated financial statements.

Also in August 2018, the FASB issued ASU 2018-14: Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)—Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The Board is issuing the amendments in this update as part of the disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles that is most important to users of each entity’s financial statements. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2020 for public business entities.  Early adoption is permitted. The Company evaluated the amendments of this update and anticipates an impact in the period of adoption to the Pension and Other Postretirement Benefit Plans footnote included in the consolidated financial statements.

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Also in August 2018, the FASB issued ASU 2018-13: Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The Board is issuing the amendments in this update as part of the disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles that is most important to users of each entity’s financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.  The Company evaluated the amendments of this update and anticipates an impact in the period of adoption to the Fair Value of Financial Instruments footnote included in the consolidated financial statements.

In July 2018, the FASB issued ASU 2018-11: Leases (Topic 842): Targeted Improvements. The amendments in this update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840. The amendments in this update also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606). If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842.  The amendments in this update are effective for the Company during the first quarter of 2019.  The Company evaluated the amendments of this update and intends to elect the optional transition method and recognize a cumulative-effect adjustment to the opening balance of retained earnings during the first quarter of 2019.

In June 2018, the FASB issued ASU 2018-07: Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).  The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.  The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.  The Company has historically applied the provisions of Topic 718 to its accounting for share based payment awards to the Company’s Board of Directors.  As a result, the Company does not anticipate an impact to the consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02: Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The amendments in this update allow for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the passage of the Tax Cuts and Jobs Act. The

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amendments in this update also require certain disclosures about stranded tax effects.  Upon adoption of the ASU, an entity was required to disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income.  The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of the amendments in this update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance.  The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.  As of December 31, 2017, the Company had $5.0 million of tax benefits stranded in accumulated OCI as a result of the passage of the Tax Cuts and Jobs Act.  The Company early adopted the amendments in this update and elected to reclassify the $5.0 million of tax benefits stranded in accumulated OCI to retained earnings during the three months ended March 31, 2018.  The Company’s policy for releasing income tax effects from accumulated other comprehensive income is to release them as investments are sold or mature and liabilities are extinguished.

In August 2017, the FASB issued ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, the Company currently expects adoption to have an immaterial impact to the consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07: Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Topic 715, Compensation—Retirement Benefits, requires an entity to present net periodic pension cost and net periodic postretirement benefit cost as a net amount that may be capitalized as part of an asset where appropriate. Users have communicated that the service cost component generally is analyzed differently from the other components of net periodic pension cost and net periodic postretirement benefit cost. To improve the consistency, transparency, and usefulness of financial information for users, the amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The Company’s current accounting treatment and presentation of net periodic pension cost and net periodic postretirement benefit cost is consistent with the provisions in ASU 2017-07.  The Company adopted the amendments in this update during the nine months ended September 30, 2018 and noted no impact to the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019. The Company is in the process of evaluating the impact of this guidance but expects that the impact will likely be material to the consolidated financial statements.

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In February 2016, the FASB issued its new lease accounting guidance in ASU 2016-02: Leases (Topic 842).  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of evaluating the impact of this guidance and anticipates an impact to the consolidated financial statements with regard to the Company’s operating lease agreements.

In January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  In addition, the amendments in this update also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period.  For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted the amendments of this update during the three months ended March 31, 2018 and recorded a cumulative-effect adjustment of $123 thousand to retained earnings representing the unrealized holding gains on equity securities with a readily determinable fair value included in other comprehensive income as of January 1, 2018.

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606) and subsequent updates. This ASU clarifies the principles for recognizing revenue and develops a common standard for U.S. GAAP and International Financial Reporting Standards. The ASU establishes a core principle that requires an entity to identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The ASU provides for improved disclosure requirements that require entities to disclose sufficient of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Company adopted the guidance effective January 1, 2018 using the modified retrospective method. The Company’s revenue is the sum of net interest income and non-interest income. The scope of the guidance excludes nearly all net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Company completed its review and determined that the majority of non-interest income revenue streams are within the scope of the new standard. Non-interest income streams that are out of scope of the new standard include BOLI, sales of investment securities, mortgage banking activities, and certain items within service charges and other income. Management reviewed contracts related to service charges on deposits, investment advisory commissions and fee income, insurance commission and fee income and certain items within other service charges and other income. The Company evaluated the impact of this ASU on the Company’s various revenue streams and, upon adoption on January 1, 2018 and going forward, does not anticipate a material impact to the consolidated financial statements. The Company has included applicable disclosures regarding revenue recognition within Note 4 of these consolidated financial statements.

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NOTE 20 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows authoritative guidance under FASB ASC Topic 820 for Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The definition of fair value under ASC 820 is the exchange price. The guidance clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).  The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

Fair value is based on quoted market prices, when available.  If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data which include: discount rate, interest rate yield curves, credit risk, default rates and expected cash flow assumptions.  In addition, valuation adjustments may be made in the determination of fair value.  These fair value adjustments may include amounts to reflect counter party credit quality, creditworthiness, liquidity and other unobservable inputs that are applied consistently over time.  These adjustments are estimated and, therefore, subject to significant management judgment, and at times, may be necessary to mitigate the possibility of error or revision in the model-based estimate of the fair value provided by the model.  The methods described above may produce fair value calculations that may not be indicative of the net realizable value.  While the Company believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair value. FASB ASC Topic 820 for Fair Value Measurements and Disclosures describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt securities, equity securities and derivative contracts that are traded in an active exchange market as well as certain U.S. Treasury securities that are highly liquid and actively traded in over-the-counter markets.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange traded assets and liabilities. The values of these items are determined using pricing models with inputs observable in the market or can be corroborated from observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, corporate debt securities and derivative contracts.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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Those assets which will continue to be measured at fair value on a recurring basis are as follows at September 30, 2018:

	Category Used for Fair Value Measurement
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Mortgage servicing rights	$	—	$	—	$	1,601	$	1,601
SBA servicing rights	—		—		1,054		1,054
Investment securities available for sale:
U.S. GSE and agency notes	—		2,873		—		2,873
Ginnie Mae guaranteed mortgage certificates	—		2,488		—		2,488
GSE collateralized mortgage obligations (“CMOs”)	—		9,817		—		9,817
GSE mortgage-backed securities	—		199,602		—		199,602
Municipal bonds
General obligation municipal bonds	—		1,847		—		1,847
Corporate securities	—		23,298		—		23,298
Money market funds	46,914		—		—		46,914
Mutual funds	221		—		—		221
Interest rate swap agreements	—		11,036		—		11,036
Total Assets	$	47,135	$	250,961	$	2,655	$	300,751
Liabilities:
Interest rate swap agreements and other contracts	$	—	$	3,261	$	—	$	3,261
Total Liabilities	$	—	$	3,261	$	—	$	3,261

Those assets which will continue to be measured at fair value on a recurring basis are as follows at December 31, 2017:

	Category Used for Fair Value Measurement
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Mortgage servicing rights	$	—	$	—	$	1,556	$	1,556
SBA servicing rights	—		—		785		785
Investment securities available for sale:
U.S. GSE and agency notes	—		3,453		—		3,453
Ginnie Mae guaranteed mortgage securities	—		3,088		—		3,088
GSE collateralized mortgage obligations (“CMOs”)			14,774		—		14,774
GSE mortgage-backed securities	—		246,140		—		246,140
Municipal bonds
General obligation municipal bonds	—		1,866		—		1,866
Corporate securities			24,083		—		24,083
Equity securities	410		—		—		410
Money market funds	16,086		—		—		16,086
Mutual funds	408		—		—		408
Interest rate swap agreements	—		2,713		—		2,713
Total Assets	$	16,904	$	296,117	$	2,341	$	315,362
Liabilities:
Interest rate swap agreements and other contracts	$	—	$	1,778	$	—	$	1,778
Total Liabilities	$	—	$	1,778	$	—	$	1,778

Level 1 Valuation Techniques and Inputs

Included in this category are equity securities, money market funds, and mutual funds.  To estimate the fair value of these securities, the Company utilizes observable quotations for the indicated security.

Level 2 Valuation Techniques and Inputs

The majority of the Company’s investment securities are reported at fair value utilizing Level 2 inputs. Prices of these securities are obtained through independent, third-party pricing services. Prices obtained through these sources include market derived quotations and matrix pricing and may include both observable and unobservable inputs. Fair market values take into consideration data such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates, cash flows, market credit spreads and other factors. The Company reviews the output from the third-party providers for reasonableness by considering

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the pricing consistency among securities with similar characteristics, where available, and comparing values with other pricing sources available to the Company. In general, the Level 2 valuation process uses the following significant inputs in determining the fair value of the different classes of investments:

U.S. Government Sponsored Enterprise (GSE) and Agency Notes. Pricing evaluations are based on obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.  Evaluations are generated on a price, yield or spread basis as determined by the observed market data.  Spreads and yields are calculated continuously throughout the day, as well as “end of day”.

Ginnie Mae Guaranteed Mortgage Certificates. Pricing evaluations are based on issuer type, coupon and maturity. The Pool specific evaluation model takes into account pool level information supplied directly by the agency.  For adjustable rate mortgages, the model takes into account indices, margin, periodic and life caps, next coupon adjustment date and the convertibility of the bond.

GSE CMOs.  For pricing evaluations, the pricing service, obtains and applies available direct market color (trades, covers, bids, offers and price talk) along with market color for similar bonds and GSE/Agency CMOs in general (including market research).  Evaluations of tranches (non-volatile and volatile) are based on ICE Data Services interpretation of accepted market modeling, trading, and pricing conventions.

GSE Mortgage-backed Securities. Included in this category are Fannie Mae and Freddie Mac fixed rate residential mortgage backed securities and Fannie Mae and Freddie Mac Adjustable Rate residential mortgage backed securities. Pricing evaluations are based on issuer type, coupon and maturity. The Pool specific evaluation model takes into account pool level information supplied directly by the GSE.  For adjustable rate mortgages, the model takes into account indices, margin, periodic and life caps, next coupon adjustment date and the convertibility of the bond.

Tax Exempt General Obligation Municipal Bonds. For pricing, the pricing service’s evaluators collect and analyze market data to determine how it should be applied to bonds within their assigned sectors.  Bonds are adjusted throughout the day based on trades and other pertinent market information. Evaluators apply this information to individual bond evaluations and then extrapolate from the adjusted bond to the same issuer, the same sector and beyond when appropriate. Within a given sector, evaluators have the ability to make daily spread adjustments for various attributes that include, but are not limited to, discounts, premiums, credit, alternative minimum tax (AMT), use of proceeds, and callability.

Corporate Securities. Pricing evaluations are based on obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.  Evaluations are generated on a price, yield or spread basis as determined by the observed market data.  Spreads and yields are calculated continuously throughout the day, as well as “end of day”.

Equities.  For a regular price on listed securities (NYSE, NASDAQ, AMEX), ICE Data Services uses the last trade on any exchange where the security trades during regular trading hours.  If the issue does not trade, the last bid from any exchange is used.  If there is no trade or bid, the last trade or bid from the previous day is used, or the last day where there was a bid or trade, going back up to 90 days, is used.  If there were no bids or trades in the last 90 days, an error message is returned by ICE Data Services.

Interest Rate Swaps and Other Contracts. The Company’s valuation methodology for over-the-counter (“OTC”) derivatives includes an analysis of discount cash flows based on Overnight Index Swap (“OIS”) rates.  Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially-collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk.

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Level 3 Valuation Techniques and Inputs

Servicing Rights. The Company determines the fair value of its servicing rights by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation includes the application of certain assumptions made by management of the Company, including prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

The tables below present all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2018 and 2017.

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Level 3 Investments Only (Dollars in thousands)	Mortgage Servicing Rights			Mortgage Servicing Rights
Balance, January 1,	$	1,556		$	1,523
Additions	108			122
Payments	(126		)	(150		)
Increase in fair value due to changes in valuation inputs or assumptions	63			39
Balance, September 30,	$	1,601		$	1,534

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Level 3 Investments Only (Dollars in thousands)	SBA Servicing Rights			SBA Servicing Rights
Balance, January 1,	$	785		$	646
Additions	573			309
Payments	(224		)	(156		)
Decrease in fair value due to changes in valuation inputs or assumptions	(80		)	(17		)
Balance, September 30,	$	1,054		$	782

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value and had a fair value below cost at the end of the period as summarized below. A loan is impaired when, based on current information, the Company determines that it is probable that the Company will be unable to collect amounts due according to the terms of the loan agreement. The Company’s impaired loans are measured based on the estimated fair value of the collateral if the loans are collateral dependent or based on a discounted cash flow analysis if the loans are not collateral dependent. Assets measured at fair value on a nonrecurring basis are as follows:

	Balance Transferred YTD
(Dollars in thousands)	September 30, 2018		Level 1		Level 2		Level 3		Gains/(Losses)
Impaired loans	$	7,331	$	—	$	—	$	7,331	$	(212	)
Other real estate owned	191		—		—		191		—

	Balance Transferred YTD
(Dollars in thousands)	September 30, 2017		Level 1		Level 2		Level 3		Gains/(Losses)
Impaired loans	$	12,923	$	—	$	—	$	12,923	$	(90	)
Other real estate owned	124		—		—		124		(12		)

43

In accordance with FASB ASC Topic 825 for Financial Instruments, Disclosures about Fair Value of Financial Instruments, the Company is required to disclose the fair value of financial instruments.  The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a distressed sale.  Fair value is best determined using observable market prices; however, for many of the Company’s financial instruments no quoted market prices are readily available.  In instances where quoted market prices are not readily available, fair value is determined using present value or other techniques appropriate for the particular instrument.  These techniques involve some degree of judgment, and as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.  Different assumptions or estimation techniques may have a material effect on the estimated fair value.

The following table sets forth the carrying and estimated fair value of the Company’s financial assets and liabilities for the periods indicated:

	Fair Value of Financial Instruments
		At September 30, 2018				At December 31, 2017
				Estimated				Estimated
	Fair Value	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Hierarchy Level	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	Level 1	$	842,938	$	842,938	$	557,615	$	557,615
Securities available for sale	See previous table	287,060		287,060		310,308		310,308
Securities held to maturity	Level 2	438,649		422,620		537,302		533,425
FHLB stock	Level 3	23,182		23,182		23,210		23,210
Loans and leases, net	Level 3	3,882,769		3,796,285		3,990,618		3,992,226
Loans held for sale	Level 2	475		490		245		249
Mortgage servicing rights	Level 3	1,601		1,601		1,556		1,556
SBA servicing rights	Level 3	1,054		1,054		785		785
Interest rate swaps	Level 2	11,036		11,036		2,713		2,713
Accrued interest receivable	Level 3	18,519		18,519		17,512		17,512
Liabilities:
Checking, Money Market & Savings	Level 1	3,430,803		3,430,803		3,293,793		3,293,793
Certificates of Deposit	Level 2	816,177		804,719		856,700		849,556
Borrowed funds	Level 2	515,000		503,338		540,439		536,011
Interest rate swaps and other contracts	Level 2	3,261		3,261		1,778		1,778
Accrued interest payable	Level 2	3,012		3,012		3,039		3,039

Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Securities Available for Sale and Held to Maturity - The fair value of investment securities, mortgage-backed securities and collateralized mortgage obligations is based on quoted market prices, dealer quotes, yield curve analysis, and prices obtained from independent pricing services.

44

FHLB Stock - The fair value of FHLB stock is estimated at its carrying value and redemption price of $100 per share.

Loans and Leases, Net - The fair value of loans and leases is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities.  Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans and leases were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

Loans Held for Sale - The fair value of loans held for sale is estimated using the current rate at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities.  Loans held for sale are carried at the lower of cost or estimated fair value.

Servicing Rights - The Company determines the fair value of its servicing rights by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation included the application of certain assumptions made by management of the Bank, including prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

Interest Rate Swaps and Other Contracts - The Company’s valuation methodology for OTC derivatives includes an analysis of discount cash flows based on OIS rates.  Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value.  Uncollateralized or partially-collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. Beginning January 1, 2013, the Company made the changes to better align its inputs, assumptions, and pricing methodologies with those used in its principal market by most dealers and major market participants.  These changes in valuation methodology were applied prospectively as a change in accounting estimate and were immaterial to the Company’s financial statements.

Accrued Interest Receivable/Payable - The carrying amounts of interest receivable/payable approximate fair value.

Deposits - The fair value of checking and money market deposits and savings accounts is the amount reported in the consolidated financial statements.  The carrying amount of checking, savings and money market accounts is the amount that is payable on demand at the reporting date.  The fair value of time deposits is generally based on a present value estimate using rates currently offered for deposits of similar remaining maturity.

Borrowed Funds - The fair value of borrowed funds is based on a present value estimate using rates currently offered.

Commitments to Extend Credit and Letters of Credit - The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans and are not included in the table above.  Because commitments to extend credit and letters of credit are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower.  The estimated fair value approximates the recorded net deferred fee amounts, which are not significant.

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2018 and December 31, 2017.  Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since September 30, 2018 and December 31, 2017 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

45

NOTE 21 — SERVICING RIGHTS

The Company sells certain residential mortgage loans and the guaranteed portion of certain Small Business Administration (“SBA”) loans to third parties and retains servicing rights and receives servicing fees.  All such transfers are accounted for as sales. When the Company sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities.  While the Company may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities.  When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized.  The Company accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

Residential Mortgage Loans

The Company has elected the fair value measurement method to value its mortgage servicing rights (“MSRs”).  Under the fair value measurement method, the Company records its MSRs on its consolidated statements of financial condition as a component of other assets at fair value with changes recorded as a component of mortgage banking income in the Company’s consolidated statements of income for each period.  The Company serviced $127.7 million and $133.4 million of residential mortgage loans as of September 30, 2018 and 2017, respectively.  During the three and nine months ended September 30, 2018, the Company recognized servicing fee income of $79 thousand and $243 thousand, respectively, compared to $83 thousand and $255 thousand during the three and nine months ended September 30, 2017, respectively.

The following is an analysis of the activity in the Company’s residential MSRs for the nine months ended September 30, 2018 and 2017:

	Residential
	Mortgage Servicing Rights
	For the Nine Months Ended September 30,
Dollars in thousands	2018			2017
Balance, January 1,	$	1,556		$	1,523
Additions	108			122
Increases (decreases) in fair value due to:
Changes in valuation input or assumptions	63			39
Paydowns	(126		)	(150		)
Balance, September 30,	$	1,601		$	1,534

The Company uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds, discount rates, escrow earnings rates and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.  At September 30, 2018, the key assumptions used to determine the fair value of the Company’s MSRs included a lifetime constant prepayment rate equal to 6.32%, a discount rate equal to 10.38% and an escrow earnings credit rate equal to 2.94%.  At September 30, 2017, the key assumptions used to determine the fair value of the Company’s MSRs included a lifetime constant prepayment rate equal to 8.10%, a discount rate equal to 9.50% and an escrow earnings credit rate equal to 1.88%.

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At September 30, 2018 and September 30, 2017, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

	Residential			Residential
	Mortgage Servicing Rights			Mortgage Servicing Rights
(Dollars in thousands)	September 30, 2018			September 30, 2017
Fair value of residential mortgage servicing rights	$	1,601		$	1,534
Weighted average life (years)	9.4 years			8.0 years
Prepayment speed	6.32		%	8.10		%
Effect on fair value of a 20% increase	$	(101	)	$	(113	)
Effect on fair value of a 10% increase	(52		)	(59		)
Effect on fair value of a 10% decrease	56			64
Effect on fair value of a 20% decrease	116			134
Discount rate	10.38		%	9.50		%
Effect on fair value of a 20% increase	$	(161	)	$	(132	)
Effect on fair value of a 10% increase	(85		)	(69		)
Effect on fair value of a 10% decrease	94			75
Effect on fair value of a 20% decrease	201			158
Escrow earnings credit	2.94		%	1.88		%
Effect on fair value of a 20% increase	$	67		$	46
Effect on fair value of a 10% increase	30			23
Effect on fair value of a 10% decrease	(43		)	(23		)
Effect on fair value of a 20% decrease	(79		)	(46		)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance.  As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.  Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

SBA Loans

The Company has elected the fair value measurement method to value its SBA loan servicing rights.  Under the fair value measurement method, the Company records its SBA loan servicing asset on its consolidated statements of financial condition as a component of other assets at fair value with changes recorded as a component of other non-interest income in the Company’s consolidated statements of income for each period.  The Company serviced $60.8 million and $49.7 million of SBA loans, as of September 30, 2018 and 2017, respectively.  During the three and nine months ended September 30, 2018, the Company recognized servicing fee income of $156 thousand and $408 thousand, respectively, compared to $115 thousand and $359 thousand for the three and nine months ended September 30, 2017, respectively.

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The following is an analysis of the activity in the Company’s SBA servicing rights for the nine months ended September 30, 2018 and September 30, 2017:

	SBA Servicing Rights
	For the Nine Months Ended September 30,
Dollars in thousands	2018			2017
Balance, January 1,	$	785		$	646
Additions	573			308
Decreases in fair value due to:
Changes in valuation input or assumptions	(80		)	(17		)
Paydowns	(224		)	(155		)
Balance, September 30,	$	1,054		$	782

The Company uses assumptions and estimates in determining the fair value of SBA servicing rights. These assumptions include prepayment speeds, discount rates, escrow earnings rates and other assumptions.  The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.  At September 30, 2018, the key assumptions used to determine the fair value of the Company’s SBA servicing rights included a lifetime constant prepayment rate equal to 9.77%, a discount rate equal to 13.88% and servicing expenses per loan of $1 thousand. At September 30, 2017, the key assumptions used to determine the fair value of the Company’s SBA servicing rights included a lifetime constant prepayment rate equal to 8.87%, a discount rate equal to 13.00% and servicing expenses per loan of $1 thousand.

At September 30, 2018 and September 30, 2017, the sensitivity of the current fair value of the SBA servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

	SBA Servicing Rights			SBA Servicing Rights
(Dollars in thousands)	September 30, 2018			September 30, 2017
Fair value of SBA servicing rights	$	1,054		$	782
Weighted average life (years)	5.3 years			5.5 years
Prepayment speed	9.77		%	8.87		%
Effect on fair value of a 20% increase	$	(59	)	$	(45	)
Effect on fair value of a 10% increase	(30		)	(23		)
Effect on fair value of a 10% decrease	32			25
Effect on fair value of a 20% decrease	66			51
Discount rate	13.88		%	13.00		%
Effect on fair value of a 20% increase	$	(84	)	$	(62	)
Effect on fair value of a 10% increase	(44		)	(33		)
Effect on fair value of a 10% decrease	47			35
Effect on fair value of a 20% decrease	99			74

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance.  As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.  Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

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NOTE 22 — DERIVATIVE FINANCIAL INSTRUMENTS

The Company is a party to derivative financial instruments in the normal course of business to meet the needs of commercial banking customers. These financial instruments primarily include interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. The Company believes that the credit risk inherent in all of the derivative contracts is minimal based on the credit standards and the netting and collateral provisions of the interest rate swap agreements.

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  These derivatives are not designated as hedges and are not speculative.  Rather, these derivatives result from a service the Company provides to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.  As of September 30, 2018, the Company had 24 interest rate swaps with an aggregate notional amount of $132.5 million related to this program.  During the three and nine months ended September 30, 2018, the Company recognized a net gain of $5 thousand and $61 thousand, respectively, compared to a net loss of $8 thousand and $49 thousand, respectively, for the same periods in 2017 related to interest rate swap agreements that are included as a component of services charges and other non-interest income in the Company’s consolidated statements of income.

Under certain circumstances, when the Company purchases a portion of a commercial loan that has an existing interest rate swap, it enters a risk participation agreement with the counterparty and assumes the credit risk of the loan customer related to the swap. The Company has entered into five risk participation agreements with a notional value of $7.9 million and a fair value of $1 thousand as of September 30, 2018. During the three months ended September 30, 2018, the Company did not recognize a gain or loss related to the risk participation agreements. During the nine months ended September 30, 2018, the Company recognized a net gain of $3 thousand, compared to a net gain of $1 thousand and $3 thousand recognized during the three and nine months ended September 30, 2017, respectively, related to the risk participation agreements that are included as a component of services charges and other noninterest income in the Company’s consolidated statements of income.

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of September 30, 2018 and December 31, 2017:

As of September 30, 2018

	Asset derivatives				Liability derivatives
(Dollars in thousands)	Notional amount		Fair value (1)		Notional amount		Fair value (2)
Interest rate swap agreements	$	66,250	$	3,339	$	66,250	$	3,260
Risk participation agreements	—		—		7,866		1
Total derivatives	$	66,250	$	3,339	$	74,116	$	3,261

(1)    Included in other assets in our Consolidated Statements of Financial Condition.

(2)    Included in other liabilities in our Consolidated Statements of Financial Condition.

49

As of December 31, 2017

	Asset derivatives				Liability derivatives
(dollars in thousands)	Notional amount		Fair value (1)		Notional amount		Fair value (2)
Interest rate swap agreements	$	68,785	$	1,791	$	68,785	$	1,774
Risk participation agreements	—		—		8,033		4
Total derivatives	$	68,785	$	1,791	$	76,818	$	1,778

(1)    Included in other assets in our Consolidated Statements of Financial Condition.

(2)    Included in other liabilities in our Consolidated Statements of Financial Condition.

The following displays offsetting interest rate swap assets and liabilities for the dates presented:

Offsetting of Derivative Assets

As of September 30, 2018

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Assets presented in		Gross Amounts Not Offset in the Statement of Financial Condition
	Recognized Assets (1)		Statement of Financial Condition		the Statement of Financial Condition		Financial Instruments		Collateral Received		Net Amount
Interest rate swaps and risk participation agreements	$	3,357	$	—	$	3,357	$	—	$	2,689	$	668

Offsetting of Derivative Liabilities

As of September 30, 2018

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities presented in		Gross Amounts Not Offset in the Statement of Financial Condition
	Recognized Liabilities (1)		Statement of Financial Condition		the Statement of Financial Condition		Financial Instruments		Collateral Posted		Net Amount
Interest rate swaps and risk participation agreements	$	3,279	$	—	$	3,279	$	—	$	—	$	3,279

(1) - Balance includes accrued interest receivable/payable and credit valuation adjustments.

Offsetting of Derivative Assets

As of December 31, 2017

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Assets presented in		Gross Amounts Not Offset in the Statement of Financial Condition
	Recognized Assets (1)		Statement of Financial Condition		the Statement of Financial Condition		Financial Instruments		Collateral Received		Net Amount
Interest rate swaps	$	1,828	$	—	$	1,828	$	—	$	1,346	$	482

Offsetting of Derivative Liabilities

As of December 31, 2017

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities presented in		Gross Amounts Not Offset in the Statement of Financial Condition
	Recognized Liabilities (1)		Statement of Financial Condition		the Statement of Financial Condition		Financial Instruments		Collateral Posted		Net Amount
Interest rate swaps	$	1,815	$	—	$	1,815	$	—	$	—	$	1,815

(1) - Balance includes accrued interest receivable/payable and credit valuation adjustments.

50

The Company has agreements with certain of its derivative counterparties that provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.  The Company also has agreements with certain of its derivative counterparties that provide that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of September 30, 2018, the termination value of the interest rate swaps and risk participation agreements in a liability position was $3.3 million.  The Company has minimum collateral posting thresholds with its counterparty. At September 30, 2018, the Company had no securities pledged as collateral on interest rate swaps. Counterparties posted collateral on interest rate swaps in the amount of $2.7 million at September 30, 2018.  If the Company had breached any of these provisions at September 30, 2018 it would have been required to settle its obligation under the agreement at the termination value and could have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the counterparty. The Company had not breached any provisions at September 30, 2018.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives designated as cash flow hedges are to add stability to interest expense on borrowings and to manage its exposure to interest rate movements. To accomplish these objectives, the Company has entered into one forward starting interest rate swap with a notional amount of $200.0 million with a commercial bank effective April 1, 2019 and maturing April 1, 2024 as part of its interest rate risk management strategy.  This interest rate swap is designated as a cash flow hedge and involves the receipt of variable rate amounts from the counterparty in exchange for the Company making fixed interest payments.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.  The Company did not recognize any hedge ineffectiveness in earnings during the period ended September 30, 2018.

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The table below presents the fair value of the Company’s derivative financial instruments designated as hedging instruments as well as their classification on the consolidated statements of condition as of September 30, 2018 and December 31, 2017:

As of September 30, 2018

	Asset derivatives
(dollars in thousands)	Notional amount		Fair value (1)
Interest rate swap agreements	$	200,000	$	7,697
Total derivatives	$	200,000	$	7,697

(1)    Included in other assets in our Consolidated Statements of Financial Condition.

As of December 31, 2017

	Asset derivatives
(dollars in thousands)	Notional amount		Fair value (1)
Interest rate swap agreements	$	200,000	$	922
Total derivatives	$	200,000	$	922

(1)    Included in other assets in our Consolidated Statements of Financial Condition.

At September 30, 2018, the counterparty posted collateral on the cash flow hedge in the amount of $6.8 million.

The Company estimated that none of the existing gains that are reported in accumulated other comprehensive income at September 30, 2018 and December 31, 2017 are expected to be reclassified into earnings within the next twelve months.  The table below presents the pre-tax net gains of the Company’s cash flow hedge for the periods ended September 30, 2018 and December 31, 2017 and where they were recorded in our Consolidated Statements of Financial Condition.

As of September 30, 2018

(dollars in thousands)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)		Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap agreements	$	7,697	$	—
Total derivatives	$	7,697	$	—

As of December 31, 2017

(dollars in thousands)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)		Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap agreements	$	922	$	—
Total derivatives	$	922	$	—

NOTE 23 — SUBSEQUENT EVENTS

On October 19, 2018, the Company announced a cash dividend of 6 cents per share, payable on or after November 8, 2018, to common shareholders of record at the close of business on October 29, 2018.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company.  These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative or regulatory changes or regulatory actions, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform, and our ability to complete our previously announced business combination with WSFS Financial Corporation. Additional factors that may affect our results are disclosed in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and its other reports filed with the U.S. Securities and Exchange Commission.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

EXECUTIVE SUMMARY

Beneficial Bancorp is a Maryland corporation and owns 100% of the outstanding common stock of the Bank, a Pennsylvania chartered savings bank.  The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 61 offices throughout the Philadelphia and Southern New Jersey area.

On August 8, 2018, WSFS Financial Corporation (“WSFS”) and the Company issued a joint press release announcing that WSFS and the Company have entered into an Agreement and Plan of Reorganization pursuant to which the Company will merge with and into WSFS, with WSFS as the surviving entity.  The transaction is subject to customary closing conditions and is expected to close during the first quarter of 2019.

Our profitability is generally a function of the revenues we earn from our interest-bearing assets less the cost of our interest-bearing liabilities plus revenues we receive from non-interest income less our provision for loan losses and non-interest expenses.

Our primary source of revenue is net interest income. Net interest income, which comprised 74.1% of our revenue for the nine months ended September 30, 2018, is the difference between the income we earn on our loans and investments and the interest we pay on our deposits and borrowings.  Changes in levels of interest rates affect our net interest income.

A secondary source of revenue is non-interest income, which is income we receive from providing products and services. Traditionally, the majority of our non-interest income has come from service charges (mostly on deposit accounts), interchange income, mortgage banking and SBA income and from fee income from our insurance and wealth management services.  We discontinued our wealth management services during the first quarter of 2018 and we sold the assets and liabilities of our insurance agency subsidiary during the three months ended September 30, 2018.

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Provision for loan losses is the expense we incur to cover the estimated inherent losses in our portfolio at each reporting period.

The non-interest expense represents our operating costs and consists of salaries and employee benefits expenses, the cost of our equity plans, occupancy expenses, depreciation, amortization and maintenance expenses and other miscellaneous expenses, such as loan and owned real estate expenses, marketing, insurance, professional services and printing and supplies expenses. Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits.

Our business results for during 2018 were favorably impacted by a rise in interest rates.  Net interest margin totaled 3.26% and 3.27% for the three and nine months ended September 30, 2018, respectively, compared to 3.09% and 3.06% for the same periods in 2017, respectively.  The increase in net interest income was primarily due to an increase yields on the investment and loan portfolios following recent Federal Reserve Bank federal funds rate increases.

Loans decreased $107.7 million, or 2.7%, to $3.93 billion at September 30, 2018, from $4.03 billion at December 31, 2017.  During the nine months ended September 30, 2018, our residential real estate portfolio increased $37.5 million, representing 5.3% annualized growth.  However, this growth was offset by a $57.1 million decrease in our total commercial portfolio and an $88.1 million decrease in our total consumer loan portfolio.  We continue to experience a number of large commercial loan payoffs as projects are completed and sold and financing is obtained from non-bank sources.  The decrease in our consumer loan portfolio was due primarily to a $49.3 million decrease in indirect auto loans resulting from our planned run-off of this portfolio segment.  As previously disclosed, we decided to exit the indirect lending business in the first quarter of 2017.  We remain focused on growing our commercial loan portfolio and leveraging our infrastructure to drive improved financial performance.

We recorded net income for the three and nine months ended September 30, 2018 of $12.4 million and $34.1 million, respectively, compared to net income of $9.4 million and $27.3 million, respectively, for the three and nine months ended September 30, 2017.  Net income for the three and nine months ended September 30, 2018 includes $2.3 million of professional fees associated with the pending merger of Beneficial with WSFS.  In addition, net income for the three and nine months ended September 30, 2018 includes a $3.3 million net gain on the sale of Beneficial Insurance Services, LLC.

During the quarter ended September 30, 2018, we entered into an asset purchase agreement with a third party to sell the net assets of Beneficial Insurance Services, LLC.  In connection with that sale, Beneficial received net proceeds of $14.1 million and realized a net gain of $3.3 million as the sale proceeds exceeded our carrying amount for Beneficial Insurance Services including goodwill and intangible assets.  Goodwill and intangible assets that related to Beneficial Insurance Services decreased $10.2 million during the quarter ended September 30, 2018 as a result of the sale.  For the nine months ending September 30, 2018, non-interest income and non-interest expense includes $4.6 million and $4.6 million, respectively, related to Beneficial Insurance Services.  These non-interest income and non-interest expense items related to Beneficial Insurance Services will not occur in future periods.

Asset quality metrics continued to remain strong with non-performing assets to total assets, excluding government guaranteed student loans, of 0.27% as of September 30, 2018.  Our allowance for loan losses totaled $43.1 million, or 1.10% of total loans, as of September 30, 2018, compared to $43.3 million, or 1.07% of total loans, as of December 31, 2017.  Our non-performing assets to total assets ratio decreased to 0.49% at September 30, 2018 compared to 0.60% at December 31, 2017.  Non-performing assets decreased $6.0 million to $28.9 million at September 30, 2018 from $34.9 million at December 31, 2017, which was primarily due to the sale of one large commercial non-performing loan totaling $7.6 million during the third quarter of 2018.

Our effective tax rate decreased to 25.9% and 24.2% for the three and nine months ended September 30, 2018 compared to 36.8% and 33.5% for the same periods in the prior year as a result of the Tax Cuts and

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Jobs Act of 2017, which was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% from 35%.

The Company purchased 945,400 shares of its common stock under its previously announced stock repurchase plan during the nine months ended September 30, 2018. We continue to maintain strong levels of capital and our capital ratios are well in excess of the levels required to be considered well-capitalized under applicable federal regulations for both the Company and the Bank. Our tangible capital to tangible assets ratio was 15.34% at both September 30, 2018 and 2017.  Tangible book value per share totaled $11.68 at September 30, 2018.

To further improve our operating returns, we continue to leverage our position as one of the largest and oldest banks headquartered in the Philadelphia metropolitan area. We are focused on acquiring and retaining customers, and then educating them by aligning our products and services to their financial needs. We also intend to deploy some of our excess capital to grow Beneficial Bank in our markets.

CRITICAL ACCOUNTING POLICIES

In the preparation of our condensed consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and that conform to general practices within the banking industry. Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies, which are discussed below, to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is determined by management based upon portfolio segment, past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. Management also considers risk characteristics by portfolio segments including, but not limited to, renewals and real estate valuations. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

The allowance for loan losses is established through a provision for loan losses charged to expense, which is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management regularly reviews the level of loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination.

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Our financial results are affected by the changes in and the level of the allowance for loan losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance for loan losses. Changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance for loan losses. Such an adjustment could materially affect net income as a result of the change in provision for credit losses. For example, a change in the estimate resulting in a 10% to 20% difference in the allowance would have resulted in an additional provision for credit losses of $4.3 million to $8.6 million for the nine months ended September 30, 2018. We also have approximately $28.9 million in non-performing assets consisting of non-performing loans and other real estate owned at September 30, 2018.  Most of these assets are collateral dependent loans where we have incurred significant credit losses to write the assets down to their current appraised value less selling costs. We continue to assess the realizability of these loans and update our appraisals on these loans each year. To the extent the property values continue to decline, there could be additional losses on these non-performing assets which may be material. For example, a 10% decrease in the collateral value supporting the non-performing assets could result in additional credit losses of $2.9 million.  In recent periods, we experienced improvement in our asset quality metrics including delinquencies, net charge-offs and non-performing assets. Management considered market conditions in deriving the estimated allowance for loan losses; however, given the continued economic difficulties, the ultimate amount of loss could vary from that estimate. For additional discussion related to the determination of the allowance for loan losses, see “—Risk Management—Analysis and Determination of the Allowance for Loan Losses” and the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Income Taxes. We are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. The estimated income tax expense (benefit) is reported in the Consolidated Statements of Operations. The evaluation pertaining to the tax expense and related tax asset and liability balances involves a high degree of judgment and subjectivity around the ultimate measurement and resolution of these matters.

Accrued taxes represent the net estimated amount due to or to be received from tax jurisdictions either currently or in the future and are reported in other assets on our consolidated statements of financial condition. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. We regularly evaluate our uncertain tax positions and estimate the appropriate level of reserves related to each of these positions.

As of September 30, 2018, we had net deferred tax assets totaling $22.0 million. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets.  The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us

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to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. The Company currently maintains a valuation allowance for certain state net operating losses that management believes it is more likely than not that such deferred tax assets will not be realized. No valuation allowance is deemed necessary against our remaining federal or remaining state deferred tax assets as of September 30, 2018. Our net deferred tax asset of $22.0 million was determined based on the current enacted federal tax rate of 21%.  Any possible future reduction in federal tax rates, would reduce the value of our net deferred tax assets and result in immediate write-down of the net deferred tax assets though our statement of operations, the effect of which would be material.

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

Total assets increased $68.8 million, or 1.2%, to $5.87 billion at September 30, 2018, compared to $5.80 billion at December 31, 2017.  The increase in total assets was primarily due to growth in total deposits of $96.5 million which led to an increase in cash and cash equivalents.

Cash and cash equivalents increased $285.3 million, or 51.2%, to $842.9 million at September 30, 2018, from $557.6 million at December 31, 2017.  The increase in cash and cash equivalents was primarily driven by investment maturities and repayments and a decrease in our total loan portfolio as well as deposit growth.

Investments decreased $121.9 million, or 14.0%, to $748.9 million at September 30, 2018, compared to $870.8 million at December 31, 2017. We continue to focus on maintaining a high-quality investment portfolio that provides a steady stream of cash flows both in the current and in rising interest rate environments.

Loans decreased $107.7 million, or 2.7%, to $3.93 billion at September 30, 2018, from $4.03 billion at December 31, 2017.  During the nine months ended September 30, 2018, our residential real estate portfolio increased $37.5 million, representing 5.3% annualized growth.  However, this growth was offset by a $57.1 million decrease in our total commercial portfolio and an $88.1 million decrease in our total consumer loan portfolio.  We continue to experience a number of large commercial loan payoffs as projects are completed and sold and financing is obtained from non-bank sources.  The decrease in our consumer loan portfolio was due primarily to a $49.3 million decrease in indirect auto loans resulting from our planned run-off of this portfolio segment.  As previously disclosed, we decided to exit the indirect lending business in the first quarter of 2017.

Deposits increased $96.5 million, or 2.3%, to $4.25 billion at September 30, 2018, from $4.15 billion at December 31, 2017.  Deposit growth was primarily achieved through organic core deposit growth of $182.2 million in interest business checking accounts and $31.4 million of growth in time deposits, partially offset by the maturity of $71.9 million of higher cost brokered certificates of deposit, which we did not renew given our excess liquidity position.  The growth in interest business checking is primarily due to one large commercial deposit account.  We expect this temporary balance to decrease in the fourth quarter.

Borrowings decreased $25.4 million to $515.0 million at September 30, 2018.  During the nine months ended September 30, 2018, the Company paid off $25.8 million of a higher cost trust preferred debenture.

Stockholders’ equity increased $2.4 million, or 0.2%, to $1.04 billion at September 30, 2018, from $1.03 billion at December 31, 2017.  The increase in stockholders’ equity was primarily due to $34.1 million of net income during the nine months ended September 30, 2018, partially offset by the declaration of cash dividends and stock repurchases.

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Comparison of Operating Results for the three months ended September 30, 2018 and September 30, 2017

General — For the three months ended September 30, 2018, net income was $12.4 million, or $0.17 per diluted share, compared to $9.4 million, or $0.13 per diluted share, for the three months ended September 30, 2017.  Net income for the three months ended September 30, 2018 includes $2.3 million of professional fees associated with the pending merger with WSFS.  In addition, net income for the three months ended September 30, 2018 includes a $3.3 million net gain on the sale of Beneficial Insurance Services, LLC, a consolidated wholly owned subsidiary of Beneficial Bank.

Net Interest Income — For the three months ended September 30, 2018, net interest income was $45.0 million, an increase of $2.6 million, or 6.1%, from the three months ended September 30, 2017. The increase in net interest income was primarily due to an increase in yields on the investment and loan portfolios following recent Federal Reserve Bank federal funds rate increases. The Company also paid off $25.8 million of a higher cost trust preferred debenture during the first quarter of 2018. The net interest margin totaled 3.26% for the quarter ended September 30, 2018 as compared to 3.09% for the same period in 2017.  During the three months ended September 30, 2018, the net interest margin was positively impacted by five basis points due to loan prepayments compared to a two basis points impact during the three months ended September 30, 2017. Also during the three months ended September 30, 2018, the net interest margin was negatively impacted 16 basis points by higher cash levels due to slower than anticipated loan growth as average cash for the period totaled $702.7 million, an increase of $314.7 million from $388.0 million during the three months ended September 30, 2017.

Provision for Loan Losses — As a result of loan charge-offs, we recorded a $1.9 million provision for loan losses during the three months ended September 30, 2018 compared to a $750 thousand provision for loan losses during the three months ended September 30, 2017.  Net charge-offs for the three months ended September 30, 2018 totaled $1.8 million, or 19 basis points annualized of average loans, compared to net charge-offs of $831 thousand, or 8 basis points annualized of average loans, in the same period in the prior year.

Non-accruing loans, excluding government guaranteed student loans, decreased $5.1 million to $15.4 million at September 30, 2018, compared to $20.5 million at December 31, 2017.  Our ratio of non-performing assets to total assets, excluding government guaranteed student loans, decreased to 0.27% at September 30, 2018 compared to 0.36% at December 31, 2017.  The decrease is primarily due to the sale of one large commercial non-performing loan totaling $7.6 million during the quarter.  We had a specific loan loss reserve of $1.5 million for this loan.  The actual loss for the loan was $766 thousand.

Our allowance for loan losses totaled $43.1 million, or 1.10% of total loans, as of September 30, 2018, compared to $43.3 million, or 1.07% of total loans, as of December 31, 2017, and $43.3 million, or 1.07% of total loans, as of September 30, 2017.

Non-interest Income — For the three months ended September 30, 2018, non-interest income totaled $9.9 million, an increase of $2.8 million, or 38.9%, from the three months ended September 30, 2017.  The increase was primarily due to a $3.3 million net gain on the sale of Beneficial Insurance Services, LLC.  This increase to non-interest income was partially offset by a $442 thousand decrease in income from insurance and advisory services during the three months ended September 30, 2018 compared to the same period in the prior year.

Non-interest Expense — For the three months ended September 30, 2018, non-interest expense totaled $36.4 million, an increase of $2.5 million, or 7.5%, from the three months ended September 30, 2017.  The increase in non-interest expense was primarily due $2.3 million of professional fees associated with the previously mentioned pending merger of Beneficial with WSFS Financial Corporation.  The increase can also be attributed to an increase in salaries and employee benefits of $1.2 million due primarily to enhanced medical coverage provided to our entire employee base, annual merit increases, an increase to our minimum wage and the costs associated with the build out of Neumann Finance.

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Income Taxes — For the three months ended September 30, 2018, we recorded a provision for income taxes of $4.3 million, reflecting an effective tax rate of 25.9%, compared to a provision for income taxes of $5.5 million, reflecting an effective tax rate of 36.8% for the three months ended September 30, 2017.  The decrease in the effective tax rate for the three months ended September 30, 2018 compared to the same period a year ago is primarily due to the passage of the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% from 35%.

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The table following table summarizes average balances and average yields and costs for the three months ended September 30, 2018 and September 30, 2017.  Yields are not presented on a tax-equivalent basis.  Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

Average Balance Tables

	Three Months Ended September 30,						Three Months Ended September 30,
	2018						2017
	Average		Interest &		Yield /		Average		Interest &		Yield /
(Dollars in thousands)	Balance		Dividends		Cost		Balance		Dividends		Cost
Interest Earning Assets:
Investment securities:
Overnight investments	$	702,747	$	3,523	1.96	%	$	388,004	$	1,239	1.25	%
Stock	23,184		373		6.39	%	23,211		273		4.66	%
Other investment securities	752,833		4,189		2.23	%	949,054		4,965		2.09	%
Total investment securities	1,478,764		8,085		2.17	%	1,360,269		6,477		1.90	%
Loans and leases:
Real estate loans
Residential	976,240		9,586		3.93	%	921,751		8,995		3.90	%
Non-residential	1,685,401		18,956		4.43	%	1,669,697		17,484		4.13	%
Total real estate	2,661,641		28,542		4.24	%	2,591,448		26,479		4.05	%
Business loans	450,286		5,648		4.92	%	441,004		5,070		4.51	%
Shared national credits- commercial business loans	171,857		1,763		4.01	%	206,532		1,686		3.20	%
Small business loans	80,143		1,231		6.03	%	97,778		1,305		5.24	%
Small business leases	136,948		1,903		5.56	%	136,641		1,925		5.64	%
Total business & small business loans and leases	839,234		10,545		4.94	%	881,955		9,986		4.46	%
Total business loans and leases	2,524,635		29,501		4.60	%	2,551,652		27,470		4.24	%
Personal loans	476,542		5,903		4.91	%	595,924		6,504		4.33	%
Total loans and leases, net of discount	3,977,417		44,990		4.47	%	4,069,327		42,969		4.18	%
Total interest earning assets	5,456,181		53,075		3.85	%	5,429,596		49,446		3.61	%
Non-interest earning assets	381,857						399,310
Total assets	$	5,838,038					$	5,828,906
Interest Bearing Liabilities:
Interest bearing savings and demand deposits:
Savings and club accounts	$	1,291,292	$	1,683	0.52	%	$	1,302,019	$	1,121	0.34	%
Money market accounts	402,070		543		0.54	%	439,045		395		0.36	%
Demand deposits	1,021,520		667		0.26	%	924,917		572		0.25	%
Demand deposits - Municipals	109,745		42		0.15	%	113,961		53		0.18	%
Certificates of deposit	811,416		2,950		1.44	%	875,292		2,519		1.14	%
Total interest-bearing deposits	3,636,043		5,885		0.64	%	3,655,234		4,660		0.51	%
Borrowings	515,054		2,233		1.70	%	540,488		2,400		1.74	%
Total interest-bearing liabilities	4,151,097		8,118		0.78	%	4,195,722		7,060		0.67	%
Non-interest-bearing deposits	591,563						530,256
Other non-interest-bearing liabilities	70,240						71,251
Total liabilities	4,812,900						4,797,229
Total stockholders’ equity	1,025,138						1,031,677
Total liabilities and stockholders’ equity	$	5,838,038					$	5,828,906
Net interest income			$	44,957					$	42,386
Interest rate spread					3.07	%					2.94	%
Net interest margin					3.26	%					3.09	%
Average interest-earning assets to average interest-bearing liabilities					131.44	%					129.41	%

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Comparison of Operating Results for the Nine Months Ended September 30, 2018 and September 30, 2017

General — For the nine months ended September 30, 2018, net income was $34.1 million, or $0.47 per diluted share, compared to net income of $27.3 million, or $0.37 per diluted share, for the nine months ended September 30, 2017.

Net Interest Income — For the nine months ended September 30, 2018, Beneficial reported net interest income of $133.3 million, an increase of $8.4 million, or 6.7%, from the nine months ended September 30, 2017. The increase in net interest income was primarily due to an increase in yields on the investment and loan portfolios following recent Federal Reserve Bank federal funds rate increases.  Our net interest margin increased to 3.27% for the nine months ended September 30, 2018, from 3.06% for the same period in 2017.  During the nine months ended September 30, 2018, the net interest margin was positively impacted by seven basis points due to loan prepayments compared to a two basis points impact during the nine months ended September 30, 2017. Also during the nine months ended September 30, 2018, the net interest margin was negatively impacted 15 basis points by higher cash levels due to slower than anticipated loan growth as average cash for the period totaled $585.0 million, an increase of $253.9 million from $331.1 million during the nine months ended September 30, 2017.

Provision for Loan Losses — As a result of net charge-offs recorded during the period, we recorded a $4.6 million provision for loan losses for the nine months ended September 30, 2018 compared to a $2.1 million provision for loan losses for the nine months ended September 30, 2017.

At September 30, 2018, the Bank’s allowance for loan losses totaled $43.1 million, or 1.10% of total loans, compared to $43.3 million, or 1.07% of total loans, at December 31, 2017.

Non-interest Income — For the nine months ended September 30, 2018, non-interest income totaled $23.9 million, an increase of $2.3 million, or 10.8%, from the nine months ended September 30, 2017.  The increase was primarily due to a $3.3 million net gain on the sale of Beneficial Insurance Services, LLC.  This increase to non-interest income was partially offset by an $835 thousand decrease in income from insurance and advisory services during the nine months ended September 30, 2018 compared to the same period in the prior year.

Non-interest Expense — For the nine months ended September 30, 2018, non-interest expense totaled $108.0 million, an increase of $4.6 million, or 4.5%, from the nine months ended September 30, 2017.  The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $3.5 million due primarily to enhanced medical coverage provided to our entire employee base, annual merit increases, an increase in our minimum wage and the costs associated with the build out of Neumann Finance.  The increase in non-interest expense was also due $2.3 million of professional fees associated with the previously mentioned pending merger of Beneficial with WSFS Financial Corporation. These increases to non-interest expense were partially offset by a $753 thousand decrease in intangible amortization expense as a result of certain intangible assets reaching the end of their estimated lives.

Income Taxes — For the nine months ended September 30, 2018, we recorded a provision for income taxes of $10.8 million, reflecting an effective tax rate of 24.2%, compared to a provision for income taxes of $13.7 million, reflecting an effective tax rate of 33.5%, for the nine months ended September 30, 2017.  The decrease in the 2018 effective tax rate was primarily a result of the passage of the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% from 35%.

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The following table summarizes average balances and average yields and costs for the nine months ended September 30, 2018 and September 30, 2017. Yields are not presented on a tax-equivalent basis.  Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

Average Balance Tables

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018						2017
	Average		Interest &		Yield /		Average		Interest &		Yield /
(Dollars in thousands)	Balance		Dividends		Cost		Balance		Dividends		Cost
Interest Earning Assets:
Investment securities:
Overnight investments	$	585,010	$	7,893	1.78	%	$	331,117	$	2,666	1.06	%
Stock	23,193		1,209		6.97	%	22,991		801		4.66	%
Other investment securities	798,459		13,376		2.23	%	985,607		15,248		2.06	%
Total investment securities	1,406,662		22,478		2.12	%	1,339,715		18,715		1.86	%
Loans and leases:
Real estate loans
Residential	960,107		28,215		3.92	%	903,798		26,683		3.94	%
Non-residential	1,682,834		56,373		4.43	%	1,664,615		51,398		4.09	%
Total real estate	2,642,941		84,588		4.24	%	2,568,413		78,081		4.03	%
Business loans	464,576		16,754		4.76	%	428,929		14,625		4.50	%
Shared national credits- commercial business loans	165,650		4,895		3.90	%	202,710		4,336		2.82	%
Small business loans	85,465		3,590		5.55	%	100,955		3,916		5.13	%
Small business leases	139,210		5,756		5.51	%	137,228		5,792		5.63	%
Total business & small business loans and leases	854,901		30,995		4.79	%	869,822		28,669		4.36	%
Total business loans and leases	2,537,735		87,368		4.55	%	2,534,437		80,067		4.18	%
Personal loans	505,050		17,875		4.73	%	627,789		19,917		4.24	%
Total loans and leases, net of discount	4,002,892		133,458		4.42	%	4,066,024		126,667		4.14	%
Total interest earning assets	5,409,554		$	155,936	3.83	%	5,405,739		$	145,382	3.57	%
Non-interest earning assets	379,812						402,431
Total assets	$	5,789,366					$	5,808,170
Interest Bearing Liabilities:
Interest bearing savings and demand deposits:
Savings and club accounts	$	1,295,879	$	4,231	0.44	%	$	1,299,584	$	3,313	0.34	%
Money market accounts	411,346		1,411		0.46	%	443,746		1,154		0.35	%
Demand deposits	973,272		1,853		0.25	%	918,441		1,664		0.24	%
Demand deposits - Municipals	112,240		142		0.17	%	121,604		180		0.20	%
Certificates of deposit	821,952		8,230		1.34	%	869,019		7,017		1.08	%
Total interest-bearing deposits	3,614,689		15,867		0.59	%	3,652,394		13,328		0.49	%
Borrowings	521,745		6,786		1.74	%	534,788		7,138		1.76	%
Total interest-bearing liabilities	4,136,434		22,653		0.73	%	4,187,182		20,466		0.65	%
Non-interest-bearing deposits	561,514						522,221
Other non-interest-bearing liabilities	72,349						72,456
Total liabilities	4,770,297						4,781,859
Total stockholders’ equity	1,019,069						1,026,311
Total liabilities and stockholders’ equity	$	5,789,366					$	5,808,170
Net interest income			$	133,283					$	124,916
Interest rate spread					3.10	%					2.92	%
Net interest margin					3.27	%					3.06	%
Average interest-earning assets to average interest-bearing liabilities					130.78	%					129.10	%

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Asset Quality

Non-performing assets decreased $6.0 million to $28.9 million at September 30, 2018, from $34.9 million at December 31, 2017. The ratio of non-performing assets to total assets decreased to 0.49% at September 30, 2018, from 0.60% at December 31, 2017.  The decrease is primarily due to the sale of one large commercial non-performing loan totaling $7.6 million during the quarter.  We had a specific loan loss reserve of $1.5 million for this loan.  The actual loss for the loan was $766 thousand.

ASSET QUALITY INDICATORS

	September 30,			June 30,			December 31,			September 30,
(Dollars in thousands)	2018			2018			2017			2017
Non-performing assets:
Non-accruing loans	$	15,427		$	20,886		$	20,521		$	20,788
Accruing loans past due 90 days or more	13,202			22,204			14,152			14,912
Total non-performing loans	$	28,629		$	43,090		$	34,673		$	35,700
Real estate owned	274			102			189			124
Total non-performing assets	$	28,903		$	43,192		$	34,862		$	35,824
Non-performing loans to total loans and leases	0.73		%	1.07		%	0.86		%	0.89		%
Non-performing assets to total assets	0.49		%	0.75		%	0.60		%	0.62		%
Non-performing assets less accruing government guaranteed student loans past due 90 days or more to total assets	0.27		%	0.36		%	0.36		%	0.36		%
ALLL to total loans and leases	1.10		%	1.07		%	1.07		%	1.07		%
ALLL to non-performing loans	150.68		%	99.95		%	124.79		%	121.20		%
ALLL to non-performing loans, excluding government guaranteed student loans	279.62		%	206.21		%	210.84		%	208.15		%

With the exception of government guaranteed student loans, we place loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired (unless return to current status is expected imminently). The accrual of interest is discontinued and reversed once an account becomes past due 90 days or more. The uncollectible portion including any cash flow or collateral deficiency of all loans is charged-off at 90 days past due or when we have confirmed there is a loss.  Non-performing consumer loans include $13.2 million and $14.2 million in government guaranteed student loans as of September 30, 2018 and December 31, 2017, respectively.

Non-performing loans are evaluated under authoritative guidance in FASB ASC Topic 310 for Receivables and Topic 450 for Contingencies and are included in the determination of the allowance for loan losses. Generally, the Company charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due.  If necessary, specific reserves are established for estimated losses in determination of the allowance for loan loss.  As of December 31, 2017, the Company maintained a $1.5 million specific valuation allowance for a $7.6 million shared national credit.  This shared national credit was sold during the quarter ended September 30, 2018 and the actual loss was $766 thousand.  No specific reserve was necessary as of September 30, 2018.

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Allowance for Loan Losses

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:

	September 30, 2018						December 31, 2017
(Dollars in thousands)	Loan Balance		ALLL		Coverage		Loan Balance		ALLL		Coverage
Commercial	$	2,482,766	$	40,751	1.64	%	$	2,531,945	$	39,148	1.55	%
Residential	981,067		933		0.10	%	943,573		838		0.09	%
Consumer	462,548		1,453		0.31	%	550,659		1,781		0.32	%
Specific Allowance	—		—		—	%	7,953		1,500		18.86	%
Total	$	3,926,381	$	43,137	1.10	%	$	4,034,130	$	43,267	1.07	%

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the appropriateness of the allowance for loan losses balance on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings and, when less allowances are necessary, a credit is taken. As of September 30, 2018, our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific valuation allowance on identified problem loans; and (2) a general valuation allowance on the remainder of the loan portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company at the time the consolidated financial statements are prepared. Management continuously evaluates its allowance methodology to reflect changes in the portfolio and current economic conditions.

Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience as well as the nine interagency qualitative factors including changes in lending policies and procedures, economic conditions, nature, volume and terms of loans, experience and ability of staff, delinquent, classified and nonaccrual loans, internal loan review system, concentrations of credits and other factors.

Our Chief Credit Officer supervises the workout department and identifies, manages and works through non-performing assets. Our credit officers and workout group identify and manage potential problem loans for our commercial loan portfolios. Changes in management, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For our commercial loan portfolios, risk ratings are assigned to each individual loan to differentiate risk within the portfolio and are reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrowers’ current risk profiles and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. When a credit’s risk rating is downgraded to a certain level, the relationship must be reviewed and detailed reports completed that document risk management strategies for the credit going forward, and the appropriate accounting actions to take in accordance with generally accepted accounting principles in the United States. When credits are downgraded beyond a certain level, our workout department becomes responsible for managing the credit risk.

Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Our commercial, consumer and residential loans are monitored for credit risk and deterioration considering factors such as delinquency, loan to value ratios, and credit scores.

When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. Management documents the collateral type, date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount. If a loan is identified as impaired and is collateral dependent, an updated appraisal is obtained to provide a baseline in determining the property’s fair market value. We also consider

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costs to sell the property and use the appraisal less selling costs to determine if a charge-off is required for the collateral dependent problem loan. If the collateral value is subject to significant volatility (due to location of asset, obsolescence, etc.) an appraisal is obtained more frequently. In-house revaluations are typically performed on a quarterly basis and updated appraisals are obtained annually, if determined necessary.

When we determine that the value of an impaired loan is less than its carrying amount, we recognize impairment through a charge-off to the allowance. We perform these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when management determines we will not collect 100% of a loan based on the fair value of the collateral, less costs to sell the property, or the net present value of expected future cash flows. Charge-offs are recorded on a monthly basis and partially charged-off loans continue to be evaluated on a monthly basis. The collateral deficiency on consumer loans and residential loans are generally charged-off when deemed to be uncollectible or delinquent 90 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include a loan that is secured by adequate collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.  Consumer loan delinquency includes $13.2 million and $14.2 million in government guaranteed student loans that were greater than 90 days delinquent and accruing at September 30, 2018 and December 31, 2017, respectively.

Additionally, we reserve for certain inherent, but undetected, losses that are probable within the loan portfolio. This is due to several factors, such as, but not limited to, inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, we have the ability to revise the allowance factors whenever necessary to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.  Regardless of the extent of our analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the subjective nature of the loan portfolio and/or individual loan evaluations.

A comprehensive analysis of the allowance for loan losses is performed on a quarterly basis. The factors supporting the allowance for loan losses do not diminish that the entire allowance for loan losses is available to absorb losses in the loan portfolio. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses.

The allowance for loan losses is subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding their adequacy and the methodology employed in their determination. Our regulators may require the allowance for loan losses to be increased based on their review of information available to them at the time of their examination.

Commercial Loan Portfolio. The allowance for the commercial portfolio totaled $40.8 million at September 30, 2018 compared to $39.1 million at December 31, 2017.  The allowance for loan losses related to the commercial portfolio was 1.64% of commercial loans at September 30, 2018 compared to 1.54% at December 31, 2017.  We continue to experience low levels of delinquencies, commercial criticized and classified loans, and net charge-offs. We believe the commercial reserves are adequate given the continued improvement in credit quality metrics during the nine months ended September 30, 2018.

Residential Loans. The allowance for the residential loan portfolio was $933 thousand, or 0.10% of residential loans at September 30, 2018 compared to $838 thousand, or 0.09%, at December 31, 2017. We continue to experience consistently low levels of net charge-offs with this portfolio during the nine months ended September 30, 2018.  We believe the balance of residential reserves is appropriate given the continued low net charge-off levels.

Consumer Loans. The allowance for the consumer loan portfolio was $1.5 million, or 0.31% of consumer loans, at September 30, 2018 compared to $1.8 million, or 0.32% of consumer loans, at December 31,

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2017. The decrease in the allowance for loan losses within this portfolio is primarily due to continued low levels of net charge-offs during the nine months ended September 30, 2018 and the continued run-off of our auto loan portfolio, which we decided to exit in the first quarter of 2017.  We believe the balance of consumer reserves is appropriate given continued low levels of net charges-offs and delinquencies.

Liquidity, Contractual Obligations, Capital and Credit Management

Liquidity Management — Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary investing activities are the origination and purchase of loans and the purchase of securities. The Bank’s primary sources of funds consist of deposits, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank of Philadelphia.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposits and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) repayment of borrowings and (5) the objectives of our asset/liability management program. Excess liquid assets are invested generally in short to intermediate-term U.S. Government Sponsored Enterprise (“GSE”) obligations.

The Bank’s most liquid assets are cash and cash equivalents.  The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.  At September 30, 2018, cash and cash equivalents totaled $842.9 million, including overnight investments of $796.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $287.1 million at September 30, 2018.  At September 30, 2018, we had $515.0 million in Federal Home Loan Bank advances outstanding. In addition, if Beneficial Bank requires funds beyond its ability to generate them internally, it can borrow funds from the Federal Home Loan Bank up to Beneficial Bank’s maximum borrowing capacity.

Our primary sources of funds include a large, stable deposit base. Core deposits, primarily gathered from our retail branch network, are our largest and most cost-effective source of funding. Core deposits totaled $3.42 billion at September 30, 2018, compared to $3.28 billion at December 31, 2017. In addition, we use brokered certificates of deposit as a funding source of our asset base.  The Company primarily relies on its retail and commercial deposit base to fund the balance sheet.  Retail and commercial deposits are a typically a lower cost and more stable funding source than brokered deposits.  The Company’s usage of brokered certificates of deposit is subject to policy limits approved by the Company’s Board of Directors.  As of September 30, 2018 and December 31, 2017, the Company had $213.7 million, or 3.6% of total assets, and $285.6 million, or 4.9% of total assets, of brokered certificates of deposit, respectively.  For both the three and nine months ended September 30, 2018, the cost of brokered certificates of deposit totaled 1.54%.

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The Company utilizes different terms for the brokered certificates of deposit to minimize the refinancing risk that exists in any given year.  The Company has structured its brokered certificates of deposit to mature over a five-year period.  The following table summarizes the outstanding balance of brokered certificates of deposit by calendar year of maturity for the period presented:

(Dollars in thousands)	September 30, 2018
Amounts mature in:
2018	$	4,521
2019	44,670
2020	99,514
2021	50,000
2022	14,950
Total	$	213,655

The Company may be restricted in its ability to accept, renew or roll over brokered deposits, depending on its capital classification. Only “well-capitalized” banks are permitted to accept, renew or roll over brokered deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. Undercapitalized banks generally may not accept, renew or roll over brokered deposits.  Should the Bank be restricted from the brokered deposit market, we could replace these deposits with a diversified base of wholesale funding sources. These uncommitted sources may include fed funds purchased from other banks, securities sold under agreements to repurchase, and FHLB advances.

As of September 30, 2018 and December 31, 2017, aggregate wholesale funding totaled $724.1 million and $790.9 million, respectively. In addition, at September 30, 2018, we had arrangements to borrow up to $2.3 billion from the FHLB of Pittsburgh and the Federal Reserve Bank of Philadelphia.  On September 30, 2018, we had $515.0 million of advances outstanding with the FHLB of Pittsburgh.

A significant use of our liquidity is the funding of loan originations.  At September 30, 2018, the Bank had $757.8 million in loan commitments outstanding, which consisted of $9.9 million, $1.5 million, and $5.8 million in commercial loan, consumer loan, and small business commercial lease new funding commitments, respectively, $480.2 million in commercial and consumer unused lines of credit, $234.6 million of commitments to fund commercial construction and other advances, and $25.8 million in standby letters of credit.  Another significant use of the Bank’s liquidity is the funding of deposit withdrawals.  Certificates of deposit due within one year of September 30, 2018 totaled $434.2 million, or 53.2% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit, brokered deposits and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2018.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

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Contractual Obligations — The following table presents certain of our contractual obligations at September 30, 2018:

			Payments due by period
			Less than		One to		Three to		More than
(Dollars in thousands)	Total		One Year		Three Years		Five Years		Five Years
Borrowed funds	$	515,000	$	200,000	$	220,000	$	95,000	$	—
Commitments to fund new loans	17,204		17,204		—		—		—
Commitments to fund commercial construction and other advances	234,590		6		59,630		82,558		92,396
Unused lines of credit	480,243		140,757		159,447		47,718		132,321
Standby letters of credit	25,754		3,650		20,914		176		1,014
Operating lease obligations	56,277		6,055		12,313		11,725		26,184
Total	$	1,329,068	$	367,672	$	472,304	$	237,177	$	251,915

The Bank’s primary investing activities are the origination and purchase of loans and the purchase of securities. The Bank’s primary financing activities consist of activity in deposit accounts, repurchase agreements and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. On October 19, 2018, the Company announced a cash dividend of 6 cents per share, payable on or about November 8, 2018 to common shareholders of record at the close of business on October 29, 2018.  The amount of dividends that the Bank may declare and pay to the Company is generally restricted under Pennsylvania law to the retained earnings of the Bank.  In 2016, the Company approved a share repurchase program of up to 10% of its outstanding common stock or 7,770,978 shares.  In 2017, the Company purchased 703,800 shares under this program. The Company repurchased 945,400 shares of its common stock during the nine months ended September 30, 2018.  During the second quarter of 2018, the Bank paid a $100.0 million dividend to the Company.  At September 30, 2018, the Company (stand-alone) had liquid assets of $133.7 million.

Capital Management — The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking regulators, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At September 30, 2018, the Company and Bank exceeded all of our regulatory capital requirements and were considered “well capitalized” under the regulatory guidelines.

Credit Risk Management.  The objective of our credit risk management strategy is to quantify and manage credit risk and to limit the risk of loss resulting from an individual customer default. Our credit risk management strategy focuses on conservatism, diversification within the loan portfolio and monitoring. Our lending practices include conservative exposure limits and underwriting, documentation and collection standards. Our credit risk management strategy also emphasizes diversification on an industry and customer level as well as regular credit examinations and monthly management reviews of large credit exposures and credits experiencing deterioration of credit quality. Underwriting activities are centralized. Our credit risk review function provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, non-accrual and reserve analysis process. Our credit review process and overall assessment of required allowances is based on quarterly assessments of the probable estimated losses inherent in the loan portfolio. We use these assessments to identify potential problem loans within the portfolio, maintain an adequate reserve and take any necessary charge-offs. Further, we have strengthened our oversight of problem assets through the formation of a

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special assets committee. The committee, which consists of our Chief Credit Officer, Chief Financial Officer and other members of senior management, increase the frequency with which classified and watch list credits are reviewed and aggressively acts to resolve problem assets.

When a borrower fails to make a required payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. Generally, our collection department follows the guidelines for servicing loans as prescribed by the appropriate investor, state or federal law. Collection activities include, but are not limited to, phone calls to borrowers and collection letters, which include a late charge notice based on the contractual requirements of the specific loan. Additional calls and notices are mailed in compliance with state and federal regulations including, but not limited to, the Fair Debt Collection Practices Act. After the 90th day of delinquency, or on a different date as allowable by state law, the collection department will forward the account to counsel and begin the foreclosure proceedings. If a foreclosure action is instituted and the loan is not in at least the early stages of a workout by the scheduled sale date, the real property securing the loan generally is sold at a foreclosure sale. If we determine that there is a possibility of a settlement, pay-off or reinstatement, the foreclosure sale may be postponed. If there is a failure to cure the delinquency, the foreclosure sale would proceed.

We charge off the collateral or cash flow deficiency on all loans once they become 90 days delinquent. Generally, all consumer loans are charged-off once they become 90 days delinquent except for education loans as they are guaranteed by the government and there is little risk of loss. In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of an enhanced risk grading system. This risk grading system is consistent with Basel II expectations and allows for precision in the analysis of commercial credit risk. Historical portfolio performance metrics, current economic conditions and delinquency monitoring are factors used to assess the credit risk in our homogenous commercial, residential and consumer loan portfolio.

In order to mitigate the credit risk related to the Company’s held-to-maturity and available-for-sale portfolios, the Company monitors the ratings of its securities. As of September 30, 2018, approximately 93.1% of the Company’s portfolio consisted of direct government obligations, government sponsored enterprise obligations or securities rated AAA by Moody’s and/or S&P. In addition, at September 30, 2018, approximately 3.7% of the investment portfolio was non-agency securities, rated below AAA but rated investment grade by Moody’s, S&P and/or Kroll and approximately 3.2% of the investment portfolio was not rated. Securities not rated consist primarily of private placement municipal bonds, FHLB stock and mutual funds.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  See “Liquidity Management” for further discussion regarding loan commitments and unused lines of credit.

For the nine months ended September 30, 2018, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

Qualitative Aspects of Market Risk

Interest rate risk is defined as the exposure of current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank’s asset/liability structure, either rising or declining interest rates can negatively affect the institution’s financial condition and results of operations.

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For example, a bank with predominantly long-term fixed-rate assets, and short-term liabilities could have an adverse earnings exposure to a rising rate environment.  Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates.  This is referred to as re-pricing or maturity mismatch risk.

Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk); from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk); and from interest rate related options imbedded in the bank’s assets and liabilities (option risk).

Our goal is to manage our interest rate risk by determining whether a given movement in interest rates affects our net income and the market value of our portfolio equity in a positive or negative way, and to execute strategies to maintain interest rate risk within established limits.

Quantitative Aspects of Market Risk

We view interest rate risk from two different perspectives. The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure.  We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which have been caused by changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity, is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.

These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk from any movement in interest rates.  Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one year).  Economic value simulation captures more information and reflects the entire asset and liability maturity spectrum. Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more comprehensive fashion, reflecting all future time periods.  It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the equity of the Company. Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines.

The Bank’s Asset/Liability Management Committee produces reports on a quarterly basis, which compare current baseline positions (no interest rate change) showing forecasted net income, the economic value of equity and the duration of individual asset and liability classes, and of equity. Duration is defined as the weighted average time to the receipt of the present value of future cash flows. These baseline forecasts are subjected to a series of interest rate changes in order to demonstrate or model the specific impact of the interest rate scenario tested on income, equity and duration.  The model, which incorporates all asset and liability rate information, simulates the effect of various interest rate movements on income and equity value. The reports identify and measure the interest rate risk exposure present in our current asset/liability structure.

The table below sets forth an approximation of our interest rate risk exposure. The simulation uses projected re-pricing of assets and liabilities at September 30, 2018.  The primary interest rate exposure measurement applied to the entire balance sheet is the effect on net interest income and earnings of a gradual change in market interest rates of plus or minus 200 basis points over a one-year time horizon, and the effect on economic value of equity of a gradual change in market rates of plus or minus 200 basis points for all projected future cash flows.  Various assumptions are made regarding the prepayment speed and optionality of loans, investments and deposits, which are based on analysis, market information and in-house studies. The assumptions regarding optionality, such as prepayments of loans and the effective

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maturity of non-maturity deposit products are documented periodically through evaluation under varying interest rate scenarios.

Because the prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results.  While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security, collateralized mortgage obligation and loan repayment activity. Further the computation does not reflect any actions that management may undertake in response to changes in interest rates. Management periodically reviews its rate assumptions based on existing and projected economic conditions.

As of September 30, 2018:

Basis point change in rates	-200			Base Forecast		+200
(Dollars in thousands)
Net Interest Income at Risk:
Net Interest Income	$	159,715		$	175,812	$	184,336
% change	(9.16		)%			4.85		%
Economic Value at Risk:
Equity	$	1,048,183		$	1,118,673	$	1,113,971
% change	(6.30		)%			(0.42		)%

As of September 30, 2018, based on the scenarios above, net interest income at risk would be positively affected in a one-year time horizon in a rising rate environment and negatively affected over a one-year time horizon in a declining rate environment. Economic value at risk would be negatively affected over a one-year time horizon in both a rising rate environment and a declining rate environment.

The current historically low interest rate environment reduces the reliability of the measurement of a 200 basis point decline in interest rates, as such a decline would result in negative interest rates.  We have established an interest rate floor of zero percent for purposes of measuring interest rate risk. Such a floor in our income simulation results in a reduction in our net interest margin as more of our liabilities than our assets are impacted by the zero percent floor.  In addition, economic value of equity is also reduced in a declining rate environment due to the negative impact to deposit premium values.

Overall, our September 30, 2018 results indicate that we are adequately positioned with limited net interest income and economic value at risk and that all interest rate risk results continue to be within our policy guidelines.

Item 4.  Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The Company and its directors have been named in a lawsuit filed in Maryland state circuit court regarding compensation levels of directors in connection with equity awards granted in the second quarter of 2016 under the Company’s 2016 Omnibus Incentive Plan. The defendants believe the lawsuit, alleging breach of fiduciary duty and unjust enrichment under Maryland law, is without merit and intend to vigorously defend it.  During the first quarter of 2018, the Company participated in a mediation at which time all parties to the lawsuit, including the Company’s insurance carrier, agreed to a proposed settlement of the lawsuit.  The Company has denied any liability in connection with the lawsuit but agreed to a proposed settlement to avoid a costly and protracted process to litigate this matter.  Notification of the settlement was sent to the shareholders in June 2018 and the terms of the settlement were approved by the Maryland Court in September 2018.  The shareholders have 30 days to appeal the terms of the settlement. The proposed settlement will not have a material impact on the Company’s financial statements.

On October 15, 2018, one purported Beneficial stockholder filed a putative class action lawsuit against Beneficial and the members of the Beneficial board of directors in the United States District Court for the Southern District of New York, captioned Dappollone v. Beneficial Bancorp, Inc., et al., Docket No. 1:18-cv-09395. The plaintiff, on behalf of himself and similarly situated Beneficial stockholders, generally alleges that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by disclosing materially incomplete and misleading information about the merger to Beneficial stockholders. The plaintiff seeks injunctive relief, unspecified damages and an award of attorneys’ fees and expenses.

On October 19, 2018, another purported Beneficial stockholder filed a putative derivative and class action lawsuit against Beneficial, the members of the Beneficial board of directors and WSFS Bank in the Circuit Court for Baltimore City, Maryland, on behalf of himself and similarly situated Beneficial stockholders, and derivatively on behalf of Beneficial, captioned Parshall v. Farnesi et al., Case No.  The plaintiff generally alleges that the Beneficial board of directors breached its fiduciary obligations by approving the terms of the merger, including allegedly inadequate merger consideration and certain deal protection devices, and making materially incomplete disclosures about the merger to Beneficial stockholders. The plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses.

On October 31, 2018, three other purported Beneficial stockholders filed separate lawsuits against Beneficial and the members of the Beneficial board of directors in the District Court for the District of Maryland, captioned Wolenter v. Beneficial Bancorp, Inc. et al. (Case No. 1:18-cv-03379-JKB), Karp v. Beneficial Bancorp, Inc. et. al. (Case No. 1:18-cv-03381-ELH), and Bushanksy v. Beneficial Bancorp, Inc. et al. (Case No. 1:18-cv-03382-DKC). The plaintiffs each generally allege that the registration statement filed with the SEC on September 27, 2018 contains materially misleading omissions or misrepresentations in violation of Section 14(a) and Section 20(a) of the Exchange Act. The plaintiffs each seek injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses.

Aside from the litigation discussed above, the Company is involved in routine legal proceedings in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition, results of operations and cash flows.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risk factors of the Company have not changed materially from those reported in the Company’s Annual Report Form 10-K for the year ended December 31, 2017.  The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2018.

Period	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 (1)
July 1-31	—	—	—	4,499,678
August 1-31	—	—	—	4,499,678
September 1-30	—	—	—	4,499,678

(1)On July 21, 2016, the Company announced that its Board of Directors had authorized a stock repurchase program to acquire up to 7,770,978 shares of the Company’s outstanding common stock, or approximately 10% of outstanding shares.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

3.1	Articles of Incorporation of Beneficial Bancorp, Inc. (1)
3.2	Bylaws of Beneficial Bancorp, Inc., as amended (2)
4.1	Stock Certificate of Beneficial Bancorp, Inc. (1)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.0	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

(1)Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-198282), as amended, initially filed with the Securities and Exchange Commission on August 21, 2014.

(2)Incorporated herein by reference to the Company’s Current Report on Form 8-K (File No. 001-36806) filed with the Securities and Exchange Commission on August 8, 2018.

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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.

		BENEFICIAL BANCORP, INC.
Dated: November 7, 2018	By:	/s/ Gerard P. Cuddy
		Gerard P. Cuddy
		President and Chief Executive Officer
		(principal executive officer)
Dated: November 7, 2018	By:	/s/ Thomas D. Cestare
		Thomas D. Cestare
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer)

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